In the main office building of the American Institute for Economic Research, three heroes of liberty look down upon our work. John Locke, FA Hayek, and Frédéric Bastiat continue to inspire the classical liberal tradition they helped build.
Amidst the trade wars and troubled economic understanding, it is tempting for economists to seek the counsel of despair. Indeed, the fallacies in popular economic reasoning are not the stuff of minute mathematical modeling, profound methodological disagreement, or advanced debate on controversial models. Rather, the sophistry on trade and tariffs is the stuff of the first or second week of economics 101. How could we have gone so wrong?
In this time of economic illiteracy, it is worth returning to one of the masters of our tradition. Bastiat (1801-1850) was a brilliant economic mind, but he also remains an unmatched and witty expositor of simple truths. And he can be a lesson of hope. Indeed, Bastiat scored many victories for liberty – including his work against tariffs with Richard Cobden and the British Anti-Corn Law League, and a corpus of writing that still inspires beginning and seasoned economists almost 200 years later. But he also lived to see the ill-fated socialist French Second Republic (1848-1851), complete with worker cooperatives and unsustainable economic redistribution.
I remember discovering Bastiat when, as an intellectual refugee from US Foreign Service, I discovered the philosophy of liberty. Then, about ten years ago, I was honored to be a reviewer of a new translation of Bastiat’s collected works, published by Liberty Fund.
What can we learn from Frédéric Bastiat in these confusing times? Here are five lessons.
1. What is seen and what is not seen
This is the simplest lesson from Bastiat, and one that is likely familiar to readers. In his series of essays, What is Seen and What is Not Seen: Or, Political Economy in One Lesson, Bastiat shares the basic lesson of economics:
In the sphere of economics an action, a habit, an institution or a law engenders not just one effect but a series of effects. Of these effects only the first is immediate; it is revealed simultaneously with its cause, it is seen. The others merely occur successively, they are not seen; we are lucky if we foresee them.”
The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee.
However, the difference between these is huge, for it almost always happens that when the immediate consequence is favorable the later consequences are disastrous, and vice versa. From which it follows that a bad Economist will pursue a small current benefit that is followed by a large disadvantage in the future, while a true Economist will pursue a large benefit in the future at the risk of suffering a small disadvantage immediately.
Bastiat illustrates the principle with a dozen examples. The broken window is the most famous, of course. In this piece, I will focus on his writings on trade; but Bastiat’s short essays on public works, taxes, and more, are well worth revisiting, as they are sadly relevant to contemporary policy.
2. The problem with trade restrictions
Bastiat was an advocate for trade. Throughout his writings, he explains through campy examples and reductio ad absurdum why trade restrictions are problematic. He compares trade to a Negative Railroad – if indeed the stops on a railroad create commerce for the city that hosts the station, why not stop the railroad every mile? Of course, this defeats the whole purpose of the railroad. “Whatever the protectionists may say, it is no less certain that the basic principle of restriction is the same as the basic principle of breaks in the tracks: the sacrifice of the consumer to the producer, of the end to the means.” Alternatively, he compares trade restrictions to complaints about improvements to a navigable river, which lower the cost of transportation:
In his essay on Reciprocity (from Sophisms) he expands the concept of tariffs as artificial barriers – which are ultimately the same as natural barriers:
We have just seen that everything that makes transport expensive during a journey acts to encourage protection or, if you prefer, that protection acts to encourage everything that makes transport expensive.
It is therefore true to say that a tariff is a marsh, a rut or gap in the road, or a steep slope, in a word, an obstacle whose effect results in increasing the difference between the prices of consumption and production. Similarly, it is incontrovertible that marshes or bogs are genuine protective tariffs.
Bastiat explains the loss from protectionism in his essay on Differential Duties (from Sophisms)
A poor farmer in the Gironde had lovingly cultivated a vine. After a lot of tiring work, he finally had the joy of producing a cask of wine, and he forgot that each drop of this precious nectar had cost his forehead one drop of sweat. “I will sell it,” he told his wife, “and with the money I will buy some yarn with which you will make our daughter’s [dowry chest].” The honest farmer went to town and met a Belgian and an Englishman. The Belgian said to him, “Give me your cask of wine and in exchange I will give you fifteen reels of yarn.” The Englishman said, “Give me your wine and I will give you twenty reels of yarn for we English spin more cheaply than the Belgians.”
However, a customs officer who happened to be there said, “My good man, trade with the Belgian if you like, but my job is to prevent you from trading with the Englishman.” What!” said the farmer, “you want me to be content with fifteen reels of yarn from Brussels when I can have twenty from Manchester?” “Certainly, do you not see that France would be the loser if you received twenty reels instead of fifteen?” “I find it difficult to understand this,” said the wine producer. [The] customs officer [answered]: “this is a fact, for all the deputies, ministers, and journalists agree on this point, that the more a people receive in exchange for a given quantity of their products, the poorer they become.” He had to conclude the bargain with the Belgian. The farmer’s daughter had only three-quarters of her [dowry chest], and these honest people still ask themselves how it can be that you are ruined by receiving four instead of three and why you are richer with three dozen napkins than with four dozen.
Trade restrictions cause a net loss, once we account for all that is not seen, as Bastiat explains in his essay on Trade Restrictions:
Yes, the [dollar] thus diverted by law to the coffers of [the protected industrialist] constitutes a benefit for him and for those whose work he is bound to stimulate. And if the decree had caused this [dollar] to come down from the moon, these beneficial effects would not be counterbalanced by any compensating bad effects. Unfortunately, it is not from the moon that the mysterious [dollar] comes, but rather from the pockets of a blacksmith, nail-maker, wheelwright, farrier, ploughman or builder, in short from the pocket of [the average consumer], who will now pay it without receiving one milligram more of iron than he did [before the tariff].
He concludes: “The use of violence is not to produce but to destroy. Oh! If the use of violence was to produce, our France would be much richer than she is.”
3. Trade deficits… and why they don’t matter
Many people are instinctively worried about trade deficits – somehow, it seems problematic that trade partners might buy more from us than they sell to us. But, first, the US is richer than almost every other country in the world, so it makes sense that the US would buy more. Second, the US has deeper capital markets with greater legal protections than almost any country in the world, so it makes sense that foreigners would invest more in the US than the US invests abroad; this capital account surplus is merely the flip side of a current account deficit. Third, all of us run trade deficits with the grocery store, the doctor, and the restaurant, who brazenly refuse to buy from us; yet we are all better off. In his Economic Sophisms, Bastiat debunks the idea that The Balance of Trade is problematic. Indeed, he playfully shows that the trade deficit could be erased if the ships carrying payments to foreigners were to sink… or be scuttled:
according to the theory of the balance of trade, France has a very simple way of doubling its capital at every moment. To do this, once it has passed it through the customs, it just has to throw it into the sea. In this case, exports will be equal to the amount of its capital; imports will be nil and even impossible, and we will gain everything that the ocean has swallowed up.
In an essay on More Reciprocity, he asks rhetorically:
In practice, is there one trading operation in a hundred, a thousand, or perhaps even ten thousand that is a direct exchange of one product for another? Since money first came into the world, has any farmer ever said to himself: “I want to buy shoes, hats, advice, and lessons only from a shoemaker, milliner, lawyer, or teacher who will buy wheat from me for exactly the equivalent value”? And why would nations impose this obstacle on themselves?
Returning to the Sophisms, he asks, once again rhetorically, why The Balance of Trade matters:
Assume, if that amuses you, that foreigners swamp us with all sorts of useful goods without asking us for anything; if our imports are infinite and our exports nil, I challenge you to prove to me that we would be the poorer for this.
4. Retaliatory tariffs
Retaliatory tariffs are the economic equivalent of cutting off one’s nose to spite one’s face: just because other countries are putting up barriers – thus impoverishing themselves and us – doesn’t mean we should put up trade barriers to… impoverish ourselves further. To be sure, even Adam Smith suggested that tariffs might be used as a strategic tool to force others to lower theirs. But the gamble is tricky, as Bastiat explains in his essay on Reciprocity (from his Sophisms):
There are people (a few, it is true, but there are some) who are beginning to understand that obstacles are no less obstacles because they are artificial and that our well-being has more to gain from freedom than from protection, precisely for the same reason that makes a canal more favorable than a “sandy, steep and difficult track.”
But, they say, this freedom has to be mutual. If we reduced our barriers with Spain without Spain reducing hers with us, we would obviously be stupid. Let us therefore sign commercial treaties on the basis of an equitable reciprocity, let us make concessions in return for concessions, and let us make the sacrifice of buying in order to obtain the benefit of selling.
In his essay on Public Works, Bastiat explained the futility of paying some workers to dig ditches, while paying others to fill them in. Sure, work is created – but no utility, and the workers’ wages have to come from somewhere (taxes, which reduce economic activity). We are reminded of Milton Friedman’s (perhaps apocryphal) quip, when he saw workers building roads using shovels, instead of machinery. The foreman explained that machinery would destroy jobs. Friedman retorted: “Oh. I thought you were building a road. If it’s jobs you want, why not give your workers spoons instead of shovels?”
Bastiat points out the conflicting nature of protectionism in his essay on Reciprocity:
I can take you to certain countries in which you will see with your own eyes the Corps of Road Builders and the Corps of Obstructors working in total harmony, in accordance with a decree issued by the same legislative assembly and at the expense of the same taxpayers, the former to clear the road and the latter to obstruct it.
5. Trade and harmony, tariff and discord
Tariffs have seen effects: protection of the domestic industry, but also increases in prices for American consumers and businesses that use imports as inputs.
They also have unseen effects: harm to all American industries (even those that aren’t directly affected by the tariffs), as consumers have less spending power in general… harm to American exporters (foreigners, who now sell less, have less money to buy American goods)… and a deadweight loss of productivity.
But one of the pernicious, unseen effects of tariffs is more general: tariffs encourage businesses to lobby for exemptions and for tariffs on their competitors. This increases political rewards relative to economic rewards, increases the size of the state, and diminishes rule of law. With the growth of the federal government over the past 50 years, it is small wonder that five of the richest counties in the US are located near Washington, DC – a city with no native industry, but one big “law factory” (as Bastiat calls Paris).
Bastiat wrote generally about this in his magnum opus, The Law. The passage is worth quoting here at length:
… since an individual cannot lawfully use force against the person, liberty, or property of another individual, then the common force — for the same reason — cannot lawfully be used to destroy the person, liberty, or property of individuals or groups.
Such a perversion of force would be, in both cases, contrary to our premise. Force has been given to us to defend our own individual rights. Who will dare to say that force has been given to us to destroy the equal rights of our brothers? Since no individual acting separately can lawfully use force to destroy the rights of others, does it not logically follow that the same principle also applies to the common force that is nothing more than the organized combination of the individual forces?
…
But, unfortunately, law by no means confines itself to its proper functions. And when it has exceeded its proper functions, it has not done so merely in some inconsequential and debatable matters. The law has gone further than this; it has acted in direct opposition to its own purpose. The law has been used to destroy its own objective: It has been applied to annihilating the justice that it was supposed to maintain; to limiting and destroying rights which its real purpose was to respect. The law has placed the collective force at the disposal of the unscrupulous who wish, without risk, to exploit the person, liberty, and property of others. It has converted plunder into a right, in order to protect plunder.
…
Self-preservation and self-development are common aspirations among all people. And if everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing.
But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others…. This fatal desire has its origin in the very nature of man — in that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain.
…
As long as it is admitted that the law may be diverted from its true purpose — that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder. Political questions will always be prejudicial, dominant, and all-absorbing. There will be fighting at the door of the Legislative Palace, and the struggle within will be no less furious.
This is exactly what happens with tariffs, as Bastiat explains in his essay on Trade Restrictions:
The idea came to [an iron manufacturer who lost to foreign trade] to stop this abuse using his own forces. This was certainly the least he could do, since he alone was harmed by the abuse. “I will take my rifle,” he said to himself, “I will put four pistols in my belt, I will fill my cartridge pouch, I will buckle on my sword and, thus equipped, I will go to the border. There, I will kill the first blacksmith, nail-maker, farrier, mechanic or locksmith who comes to do business with them and not with me. That will teach him how to conduct himself properly.”
When he was about to leave, [our industrialist] had second thoughts, which mellowed his bellicose ardor somewhat. He said to himself: “First of all, it is not totally out of the question that my fellow-citizens and enemies, the purchasers of iron, will take this action badly, and instead of letting themselves be killed they will kill me first. Next, even if I marshal all my servants, we cannot guard all the border posts. Finally, this action will cost me a great deal, more than the result is worth.”
He then has “a flash of inspiration” as he realizes he can pervert the law to advance his goals without putting himself in danger:
He remembered that in Paris there was a great law factory. “What is a law?” he asked himself. “It is a measure to which everyone is required to comply once it has been decreed, whether it is good or bad. To ensure the execution of the aforesaid, a public force is organized, and in order to constitute the said public force, men and money are drawn from the nation.
If, therefore, I succeeded in obtaining from the great law factory a tiny little law that said: “Iron from Belgium is prohibited,” I would achieve the following results: the government would replace the few servants I wanted to send to the border by twenty thousand sons of my recalcitrant blacksmiths, locksmiths, nail-makers, farriers, artisans, mechanics, and ploughmen. Then, in order to keep these twenty thousand customs officers in good heart and health, it would distribute twenty five million francs taken from these same blacksmiths, nail-makers, artisans, and ploughmen. The security would be better done, it would cost me nothing, I would not be exposed to the brutality of the dealers, I would sell iron at my price and I would enjoy the sweet recreation of seeing our great nation shamefully bamboozled. That would teach it to claim incessantly to be the precursor and promoter of all progress in Europe. Oh! That would be a smart move and is worth trying.
Bastiat concludes of this cronyism – the use of public means to advance private goals:
The violence exercised at the border by [the iron manufacturer] himself or that which he has exercised through the law may be considered to be very different from the moral point of view. Some people think that plunder loses all its immorality when it is legal. For my part, I cannot imagine a circumstance that is worse. Be that as it may, what is certain is that the economic results are the same.
In his letter To The Youth of France, Bastiat explains how markets create harmonies, while intervention creates antagonisms, as the state becomes a vast instrument of favors and redistribution. American politics would not be so toxic and divisive if the size and scope of the federal government had not increased beyond its constitutional bounds. But about half of American economic activity is controlled by bureaucrats and politicians, rather than by consumers and entrepreneurs (about 25 percent by the federal government, almost 15 percent by state and local governments, and 10 percent in federal regulatory compliance). Consider also that more than 70 percent of federal spending is not authorized by the Constitution.
If you consider individual self-interest as antagonistic to the general interest, where do you propose to establish the acting principle of coercion? Where will you put its fulcrum? Will it be outside of humanity? It would have to be, in order to escape the consequences of your law. For if you entrust men with arbitrary power, you must first prove that these men are molded of a different clay from the rest of us; that they, unlike us, will never be moved by the inevitable principle of self-interest; and that when they are placed in a situation where there can be no possible restraint upon them or any resistance to them, their minds will be exempt from error, their hands from greed, and their hearts from covetousness.
What makes the various socialist schools (I mean here those schools that look to an artificial social order for the solution of the social problem) radically different from the economist school is not some minor detail in viewpoint or in preferred form of government; it is to be found in their respective points of departure, in their answers to this primary and central question: Are men’s interests, when left to themselves, harmonious or antagonistic?
It is evident that the socialists set out in quest of an artificial social order only because they deemed the natural order to be either bad or inadequate; and they deemed it bad or inadequate only because they felt that men’s interests are fundamentally antagonistic, for otherwise they would not have had recourse to coercion. It is not necessary to force into harmony things that are inherently harmonious.
Therefore they have found fundamental antagonisms everywhere:
Between the property owner and the worker.
Between capital and labor.
Between the common people and the bourgeoisie.
Between agriculture and industry.
Between the farmer and the city-dweller.
Between the native-born and the foreigner.
Between the producer and the consumer.
Between civilization and the social order.
And, to sum it all up in a single phrase:
Between personal liberty and a harmonious social order.
Conclusion
Bastiat wrote almost 200 years ago. But his insight is timeless and his delivery remains unmatched, as he combines campy, folksy stories with reductio ad absurdum, and blinding economic logic.
In this column, I hope to have whetted the reader’s appetite, and hope this will be an invitation to return to Bastiat. I recommend, in order:
1. What is Seen and What is Not Seen, or Political Economy in One Lesson, the clearest, most hard-hitting of Bastiat’s insights.
2. The Law, Bastiat’s overview of political economy and the role of the state.
3. For those who want deeper deliciousness, The Economic Harmonies (and especially the introduction, To the Youth of France) and his Economic Sophisms.