The gold standard was an international standard. It safeguarded the stability of foreign exchange rates. It was a corollary of free trade and of the international division of labor. Therefore those who favored etatism and radical protectionism disparaged it and advocated its abolition. Their campaign was successful.
Even at the height of liberalism governments did not give up trying to put easy money schemes into effect. Public opinion is not prepared to realize that interest is a market phenomenon which cannot be abolished by government interference. Everybody values a loaf of bread available for today’s consumption higher than a loaf which will be available only ten or a hundred years hence. As long as this is true, every economic activity must take it into account. Even a socialist management would be forced to pay full regard to it.
In a market economy the rate of interest has a tendency to correspond to the amount of this difference in the valuation of future goods and present goods. True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression.
The gold standard put a check on governmental plans for easy money. It was impossible to indulge in credit expansion and yet cling to the gold parity permanently fixed by law. Governments had to choose between the gold standard and their—in the long run disastrous—policy of credit expansion. The gold standard did not collapse. The governments destroyed it. It was as incompatible with etatism as was free trade. The various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports. Stability of foreign exchange rates was in their eyes a mischief, not a blessing.
No international agreements or international planning is needed if a government wants to return to the gold standard. Every nation, whether rich or poor, powerful or feeble, can at any hour once again adopt the gold standard. The only condition required is the abandonment of an easy money policy and of the endeavors to combat imports by devaluation.
The question involved here is not whether a nation should return to the particular gold parity that it had once established and has long since abandoned. Such a policy would of course now mean deflation. But every government is free to stabilize the existing exchange ratio between its national currency unit and gold, and to keep this ratio stable. If there is no further credit expansion and no further inflation, the mechanism of the gold standard or of the gold exchange standard will work again.
All governments, however, are firmly resolved not to relinquish inflation and credit expansion. They have all sold their souls to the devil of easy money. It is a great comfort to every administration to be able to make its citizens happy by spending. For public opinion will then attribute the resulting boom to its current rulers. The inevitable slump will occur later and burden their successors. It is the typical policy of après nous le déluge. Lord Keynes, the champion of this policy, says: “In the long run we are all dead.” But unfortunately nearly all of us outlive the short run. We are destined to spend decades paying for the easy money orgy of a few years.
Inflation is essentially antidemocratic. Democratic control is budgetary control. The government has but one source of revenue—taxes. No taxation is legal without parliamentary consent. But if the government has other sources of income it can free itself from this control.
If war becomes unavoidable, a genuinely democratic government is forced to tell the country the truth. It must say: “We are compelled to fight for our independence. You citizens must carry the burden. You must pay higher taxes and therefore restrict your consumption.” But if the ruling party does not want to imperil its popularity by heavy taxation, it takes recourse to inflation.
The days are gone in which most persons in authority considered stability of foreign exchange rates to be an advantage. Devaluation of a country’s currency has now become a regular means of restricting imports and expropriating foreign capital. It is one of the methods of economic nationalism. Few people now wish stable foreign exchange rates for their own countries. Their own country, as they see it, is fighting the trade barriers of other nations and the progressive devaluation of other nations’ currency systems. Why should they venture to demolish their own trade walls?
Some of the advocates of a new international currency believe that gold is not fit for this service precisely because it does put a check on credit expansion. Their idea is a universal paper money issued by an international world authority or an international bank of issue. The individual nations would be obliged to keep their local currencies at par with the world currency. The world authority alone would have the right to issue additional paper money or to authorize the expansion of credit by the world bank. Thus there would be stability of exchange rates between the various local currency systems, while the alleged blessings of inflation and credit expansion would be preserved.
These plans fail, however, to take account of the crucial point. In every instance of inflation or credit expansion there are two groups, that of the gainers and that of the losers. The creditors are the losers; it is their loss that is the profit of the debtors. But this is not all. The more fateful results of inflation derive from the fact that the rise in prices and wages which it causes occurs at different times and in different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and to a higher level than others. While inflation is under way, some people enjoy the benefit of higher prices on the goods and services they sell, while the prices of goods and services they buy have not yet risen at all or not to the same extent. These people profiteer by virtue of their fortunate position. For them inflation is good business. Their gains are derived from the losses of other sections of the population. The losers are those in the unhappy situation of selling services and commodities whose prices have not yet risen at all or not in the same degree as the prices of things they buy for their own consumption. Two of the world’s greatest philosophers, David Hume and John Stuart Mill, took pains to construct a scheme of inflationary changes in which the rise of prices and wages occurs at the same time and to the same extent for all commodities and services. They both failed in the endeavor. Modern monetary theory has provided us with the irrefutable demonstration that this disproportion and nonsimultaneousness are inevitable features of every change in the quantity of money and credit.
Under a system of world inflation or world credit expansion every nation will be eager to belong to the class of gainers and not to that of the losers. It will ask for as much as possible of the additional quantity of paper money or credit for its own country. As no method could eliminate the inequalities mentioned above, and as no just principle for the distribution could be found, antagonisms would originate for which there would be no satisfactory solution. The populous poor nations of Asia would, for instance, advocate a per capita allotment, a procedure which would result in raising the prices of the raw materials they produce more quickly than those of the manufactured goods they buy. The richer nations would ask for a distribution according to national incomes or according to the total amount of business turnover or other similar standards. There is no hope that an agreement could be reached.
This article by Murray Rothbard was recently featured at Mises.org. It originally appeared in the September, 1985 edition of The Free Market.
It was a scene familiar to any nostalgia buff: all-night lines waiting for the banks (first in Ohio, then in Maryland) to open; pompous but mendacious assurances by the bankers that all is well and that the people should go home; a stubborn insistence by depositors to get their money out; and the consequent closing of the banks by government, while at the same time the banks were permitted to stay in existence and collect the debts due them by their borrowers.
In other words, instead of government protecting private property and enforcing voluntary contracts, it deliberately violated the property of the depositors by barring them from retrieving their own money from the banks.
All this was, of course, a replay of the early 1930s: the last era of massive runs on banks. On the surface the weakness was the fact that the failed banks were insured by private or state deposit insurance agencies, whereas the banks that easily withstood the storm were insured by the federal government (FDIC for commercial banks; FSLIC for savings and loan banks).
But why? What is the magic elixir possessed by the federal government that neither private firms nor states can muster? The defenders of the private insurance agencies noted that they were technically in better financial shape than FSLIC or FDIC, since they had greater reserves per deposit dollar insured. How is it that private firms, so far superior to government in all other operations, should be so defective in this one area? Is there something unique about money that requires federal control?
The answer to this puzzle lies in the anguished statements of the savings and loan banks in Ohio and in Maryland, after the first of their number went under because of spectacularly unsound loans. “What a pity,” they in effect complained, “that the failure of this one unsound bank should drag the sound banks down with them!”
But in what sense is a bank “sound” when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?
The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercialbanks, the reserve fraction is now about 10 percent; for the thrifts it is far less.
This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.
We now see why private enterprise works so badly in the deposit insurance business. For private enterprise only works in a business that is legitimate and useful, where needs are being fulfilled. It is impossible to “insure” a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable.
What, then, is the magic potion of the federal government? Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government–and not the states or private firms–can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.
Yes, the FDIC and FSLIC “work,” but only because the unlimited monopoly power to print money can “work” to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.
But now bank runs–at least for the overwhelming majority of banks under federal deposit insurance–are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation.
Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can’t meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.
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27 March 13 | Category: Economics | 4 comments
From Frédéric Bastiat’s classic ”That Which Is Seen, and That Which Is Not Seen”, this essay was recently featured at Mises.org.
It is the same with a people as it is with a man. If it wishes to give itself some gratification, it naturally considers whether it is worth what it costs. To a nation, security is the greatest of advantages. If, in order to obtain it, it is necessary to have an army of a hundred thousand men, I have nothing to say against it. It is an enjoyment bought by a sacrifice. Let me not be misunderstood upon the extent of my position. A member of the assembly proposes to disband a hundred thousand men, for the sake of relieving the tax-payers of a hundred million.
If we confine ourselves to this answer, “The hundred thousand men, and these hundred million of money, are indispensable to the national security: it is a sacrifice; but without this sacrifice, France would be torn by factions or invaded by some foreign power” — I have nothing to object to this argument, which may be true or false in fact, but which theoretically contains nothing which militates against economics. The error begins when the sacrifice itself is said to be an advantage because it profits somebody.
Now I am very much mistaken if, the moment the author of the proposal has taken his seat, some orator will not rise and say, “Disband a hundred thousand men! Do you know what you are saying? What will become of them? Where will they get a living? Don’t you know that work is scarce everywhere? That every field is overstocked? Would you turn them out of doors to increase competition and to weigh upon the rate of wages? Just now, when it is a hard matter to live at all, it would be a pretty thing if the State must find bread for a hundred thousand individuals! Consider, besides, that the army consumes wine, arms, clothing — that it promotes the activity of manufactures in garrison towns — that it is, in short, the godsend of innumerable purveyors. Why, anyone must tremble at the bare idea of doing away with this immense industrial stimulus.”
This discourse, it is evident, concludes by voting the maintenance of a hundred thousand soldiers, for reasons drawn from the necessity of the service, and from economical considerations. It is these economical considerations only that I have to refute.
A hundred thousand men, costing the taxpayers a hundred million of money, live and bring to the purveyors as much as a hundred million can supply. This is that which is seen.
But, a hundred million taken from the pockets of the tax-payers, ceases to maintain these taxpayers and their purveyors, as far as a hundred million reaches. This is that which is not seen. Now make your calculations. Add it all up, and tell me what profit there is for the masses?
I will tell you where the loss lies; and to simplify it, instead of speaking of a hundred thousand men and a hundred million of money, it shall be of one man and a thousand francs.
We will suppose that we are in the village of A. The recruiting sergeants go their round, and take off a man. The tax-gatherers go their round, and take off a thousand francs. The man and the sum of money are taken to Metz, and the latter is destined to support the former for a year without doing anything. If you consider Metz only, you are quite right; the measure is a very advantageous one: but if you look toward the village of A, you will judge very differently; for, unless you are very blind indeed, you will see that that village has lost a worker, and the thousand francs which would remunerate his labor, as well as the activity which, by the expenditure of those thousand francs, it would spread around it.
At first sight, there would seem to be some compensation. What took place at the village, now takes place at Metz, that is all. But the loss is to be estimated in this way: At the village, a man dug and worked; he was a worker. At Metz, he turns to the right about and to the left about; he is a soldier. The money and the circulation are the same in both cases; but in the one there were three hundred days of productive labor, in the other there are three hundred days of unproductive labor, supposing, of course, that a part of the army is not indispensable to the public safety.
Now, suppose the disbanding to take place. You tell me there will be a surplus of a hundred thousand workers, that competition will be stimulated, and it will reduce the rate of wages. This is what you see.
But what you do not see is this. You do not see that to dismiss a hundred thousand soldiers is not to do away with a hundred million of money, but to return it to the tax-payers. You do not see that to throw a hundred thousand workers on the market, is to throw into it, at the same moment, the hundred million of money needed to pay for their labor: that, consequently, the same act that increases the supply of hands, increases also the demand; from which it follows, that your fear of a reduction of wages is unfounded. You do not see that, before the disbanding as well as after it, there are in the country a hundred million of money corresponding with the hundred thousand men. That the whole difference consists in this: before the disbanding, the country gave the hundred million to the hundred thousand men for doing nothing; and that after it, it pays them the same sum for working. You do not see, in short, that when a taxpayer gives his money either to a soldier in exchange for nothing, or to a worker in exchange for something, all the ultimate consequences of the circulation of this money are the same in the two cases; only, in the second case the taxpayer receives something, in the former he receives nothing. The result is — a dead loss to the nation.
The sophism which I am here combating will not stand the test of progression, which is the touchstone of principles. If, when every compensation is made, and all interests satisfied, there is a national profit in increasing the army, why not enroll under its banners the entire male population of the country?
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7 February 13 | Category: Economics | 26 comments
In an article reprinted at Mises.org, John Papola explains:
Each year, our attention turns to the holidays… and to holiday consumer spending! We’re told repeatedly that, because consumer spending is 70 percent of measured GDP, such spending is vital to economic growth and job creation. This must mean that savings, the opposite of consumption, is bad for growth.
This view of macroeconomics was first popularly asserted by Thomas Malthus in 1820, nearly 200 years ago. Malthus believed recessions were caused by “underconsumption” because there was a “general glut” of goods unsold. To recover from a recession and grow, we needed to stop all the saving and spend more to buy up all the goods on store shelves. Savers are like the miserly Ebenezer Scrooge. If you want a happy holiday, you’ve got to clear those shelves and give people a reason to produce more and create jobs. Or so Malthus thought.
John Maynard Keynes resurrected this approach and built on it with his influential “General Theory”, which now underpins much of our government policy and public discussion of spending and economic growth. Keynesians believe aggregate spending drives the economy and savings is a “leak” out of the flow of spending. Indeed, this economic philosophy underpins many people’s widespread obsession with retail sales each holiday season. Keynesian Macro Santa’s sack is filled with spending.
But there is another view on recessions, recoveries and growth.
Classical and Austrian economists such as Adam Smith, Jean-Baptiste Say and Friedrich Hayek viewed savings as the vital lifeblood of economic growth and production as the means by which we live better and consume more in the long term. Our savings aren’t simply taken out of the economic system, but become the source of capital that entrepreneurs use to create new goods and increase productivity. These economists believe this increased productivity is the key to a wealthier world. Before we consume, we must effectively produce what others value — at prices that cover the costs. This fundamental idea, that our demand for goods is enabled and constituted by our supply of other goods came to be known as the “Law of Markets” and later “Say’s Law”. For classical and Austrian economics, recessions happen when producers make mistakes. They create goods that can’t be sold at a profit. These malinvestments tend to cluster in a recession as a result of systematic problems, such as disruptions in the financial system and often government interventions in the economy.
Recovery and growth in the classical and Austrian view is driven by restructuring production so that entrepreneurs discover again the best — i.e. the most valuable and sustainable — ways to serve customers. That process is led by new entrepreneurs and driven by savers who make capital available to fund new investments and new ventures. Sustainable saving and investment means creating more value for others while using fewer resources. This process lies at the core of healthy economic growth, including better job opportunities and a rising standard of living.
This classic essay by Frédéric Bastiat was recently featured at Mises.org. It was first published in 1845, as the tenth chapter of Bastiat’s Economic Sophisms.
We have just seen that whatever increases the expense of conveying commodities from one country to another — in other words, whatever renders transport more onerous — acts in the same way as a protective duty; or if you prefer to put it in another shape, that a protective duty acts in the same way as more onerous transport.
A tariff, then, may be regarded in the same light as a marsh, a rut, an obstruction, a steep declivity — in a word, it is an obstacle, the effect of which is to augment the difference between the price the producer of a commodity receives and the price the consumer pays for it. In the same way, it is undoubtedly true that marshes and quagmires are to be regarded in the same light as protective tariffs.
There are people (few in number, it is true, but there are such people) who begin to understand that obstacles are not less obstacles because they are artificial, and that our mercantile prospects have more to gain from liberty than from protection, and exactly for the same reason that makes a canal more favorable to traffic than a steep, roundabout, and inconvenient road.
But they maintain that this liberty must be reciprocal. If we remove the barriers we have erected against the admission of Spanish goods, for example, Spain must remove the barriers she has erected against the admission of ours. They are, therefore, the advocates of commercial treaties, on the basis of exact reciprocity, concession for concession; let us make the sacrifice of buying, say they, to obtain the advantage of selling.
People who reason in this way, I am sorry to say, are, whether they know it or not, protectionists in principle; only, they are a little more inconsistent than pure protectionists, as the latter are more inconsistent than absolute prohibitionists.
The following apologue will demonstrate this.
Stulta and Puera
There were, no matter where, two towns called Stulta and Puera. They completed at great cost a highway from the one town to the other. When this was done, Stulta said to herself, “See how Puera inundates us with her products; we must see to it.” In consequence, they created and paid a body of obstructives, so called because their business was to place obstacles in the way of traffic coming from Puera. Soon afterwards Puera did the same.
At the end of some centuries, knowledge having in the interim made great progress, the common sense of Puera enabled her to see that such reciprocal obstacles could only be reciprocally hurtful. She therefore sent an envoy to Stulta, who, laying aside official phraseology, spoke to this effect: “We have made a highway, and now we throw obstacles in the way of using it. This is absurd. It would have been better to have left things as they were. We should not, in that case, have had to pay for making the road in the first place, nor afterwards have incurred the expense of maintaining obstructives. In the name of Puera, I come to propose to you, not to give up opposing each other all at once — that would be to act upon a principle, and we despise principles as much as you do — but to lessen somewhat the present obstacles, taking care to estimate equitably the respective sacrifices we make for this purpose.” So spoke the envoy. Stulta asked for time to consider the proposal, and proceeded to consult, in succession, her manufacturers and agriculturists. At length, after the lapse of some years, she declared that the negotiations were broken off.
On receiving this intimation, the inhabitants of Puera held a meeting. An old gentleman (they always suspected he had been secretly bought by Stulta) rose and said, “The obstacles created by Stulta injure our sales, which is a misfortune. Those we have ourselves created injure our purchases, which is another misfortune. With reference to the first, we are powerless; but the second rests with ourselves. Let us, at least, get rid of one, since we cannot rid ourselves of both evils. Let us suppress our obstructives without requiring Stulta to do the same. Some day, no doubt, she will come to know her own interests better.”
A second counselor, a practical, matter-of-fact man, guiltless of any acquaintance with principles, and brought up in the ways of his forefathers, replied: “Don’t listen to that Utopian dreamer, that theorist, that innovator, that economist, that Stultomaniac. We shall all be undone if the stoppages of the road are not equalized, weighed, and balanced between Stulta and Puera. There would be greater difficulty in going than in coming, in exporting than in importing. We should find ourselves in the same condition of inferiority relatively to Stulta as Havre, Nantes, Bordeaux, Lisbon, London, Hamburg, and New Orleans are with relation to the towns situated at the sources of the Seine, the Loire, the Garonne, the Tagus, the Thames, the Elbe, and the Mississippi, for it is more difficult for a ship to ascend than to descend a river. (A Voice: Towns at the mouths of rivers prosper more than towns at their source.)
“This is impossible. (Same Voice: But it is so.) Well, if it be so, they have prospered contrary to rules.” Reasoning so conclusive convinced the assembly, and the orator followed up his victory by talking largely of national independence, national honor, national dignity, national labor, inundation of products, tributes, murderous competition. In short, he carried the vote in favor of the maintenance of obstacles; and if you are at all curious on the subject, I can point out to you countries where you will see with your own eyes road makers and obstructives working together on the most friendly terms possible, under the orders of the same legislative assembly, and at the expense of the same taxpayers, the one set endeavoring to clear the road, and the other set doing their utmost to render it impassable.
This classic essay by Frédéric Bastiat was recently featured at Mises.org. It was first published in 1845, as the second chapter of Bastiat’s Economic Sophisms.
The obstacle mistaken for the cause — scarcity mistaken for abundance — this is the same fallacy under another aspect; and it is well to study it in all its phases.
Man is originally destitute of everything.
Between this destitution and the satisfaction of his wants there exist a multitude of obstacles that labor enables us to surmount. It is of interest to inquire how and why these very obstacles to his material prosperity have come to be mistaken for the cause of that prosperity.
I want to travel a hundred miles. But between the starting-point and the place of my destination, mountains, rivers, marshes, impenetrable forests, brigands — in a word, obstacles — interpose themselves; and to overcome these obstacles it is necessary for me to employ many efforts, or, what comes to the same thing, that others should employ many efforts for me, the price of which I must pay them. It is clear that I should have been in a better situation if these obstacles had not existed.
On his long journey through life, from the cradle to the grave, man has need to assimilate to himself a prodigious quantity of alimentary substances, to protect himself against the inclemency of the weather, to preserve himself from a number of ailments, or cure himself of them. Hunger, thirst, disease, heat, cold, are so many obstacles strewn along his path. In a state of isolation he must overcome them all by hunting, fishing, tillage, spinning, weaving, building; and it is clear that it would be better for him that these obstacles were less numerous and formidable, or, better still, that they did not exist at all. In society he does not combat these obstacles personally, but others do it for him; and in return he employs himself in removing one of those obstacles that are encountered by his fellow men.
It is clear also, considering things in the gross, that it would be better for men in the aggregate, or for society, that these obstacles should be as few and feeble as possible.
But when we come to scrutinize the social phenomena in detail, and men’s sentiments as modified by the introduction of exchange, we soon perceive how men have come to confound wants with wealth, the obstacle with the cause.
The separation of employments, the division of labor, which results from the faculty of exchanging, causes each man, instead of struggling on his own account to overcome all the obstacles that surround him, to combat only one of them; he overcomes that one not for himself but for his fellow men, who in turn render him the same service.
The consequence is that this man, in combating this obstacle that it is his special business to overcome for the sake of others, sees in it the immediate source of his own wealth. The greater, the more formidable, the more keenly felt this obstacle is, the greater will be the remuneration that his fellow men will be disposed to accord him; that is to say, the more ready will they be to remove the obstacles that stand in his way.
The physician, for example, does not bake his own bread, or manufacture his own instruments, or weave or make his own coat. Others do these things for him, and in return he treats the diseases with which his patients are afflicted. The more numerous, severe, and frequent these diseases are, the more others consent, and are obliged, to do for his personal comfort. Regarding it from this point of view, disease, that general obstacle to human happiness, becomes a cause of material prosperity to the individual physician. The same argument applies to all producers in their several departments. The ship owner derives his profits from the obstacle called distance; the agriculturist from that called hunger; the manufacturer of cloth from that called cold; the schoolmaster lives upon ignorance; the lapidary upon vanity; the attorney on cupidity; the notary upon possible bad faith — just as the physician lives upon the diseases of men. It is quite true, therefore, that each profession has an immediate interest in the continuation, nay, in the extension, of the special obstacle which it is its business to combat.
Observing this, theorists make their appearance, and, founding a system on their individual sentiments, tell us: Want is wealth, labor is wealth, obstacles to material prosperity are prosperity. To multiply obstacles is to support industry.
Then statesmen intervene. They have the disposal of the public force; and what more natural than to make it available for developing and multiplying obstacles, since this is developing and multiplying wealth? They say, for example: If we prevent the importation of iron from places where it is abundant, we place an obstacle in the way of its being procured. This obstacle, keenly felt at home, will induce men to pay in order to be set free from it. A certain number of our fellow citizens will devote themselves to combating it, and this obstacle will make their fortune. The greater the obstacle is — that is, the scarcer, the more inaccessible, the more difficult to transport, the more distant from the place where it is to be used, the mineral sought for becomes — the more hands will be engaged in the various ramifications of this branch of industry. Exclude, then, foreign iron, create an obstacle, for you thereby create the work that is to overcome it.
The same reasoning leads to the proscription of machinery.
Here, for instance, are men who are in want of casks for the storage of their wine. This is an obstacle; and here are other men whose business it is to remove that obstacle by making the casks that are wanted. It is fortunate, then, that this obstacle should exist, since it gives employment to a branch of national industry, and enriches a certain number of our fellow citizens. But then we have ingenious machinery invented for felling the oak, cutting it up into staves, and forming them into the wine-casks that are wanted. By this means the obstacle is lessened, and so are the gains of the cooper. Let us maintain both at their former elevation by a law, and ban the machinery.
To get at the root of this sophism it is necessary only to reflect that human labor is not the end, but the means. It never remains unemployed. If one obstacle is removed, it does battle with another; and society is freed from two obstacles by the same amount of labor that was formerly required for the removal of one. If the labor of the cooper is rendered unnecessary in one department, it will soon take another direction. But how and from what source will it be remunerated? From the same source exactly from which it is remunerated at present; for when a certain amount of labor becomes disposable by the removal of an obstacle, a corresponding amount of remuneration becomes disposable also. To maintain that human labor will ever come to want employment, would be to maintain that the human race will cease to encounter obstacles. In that case labor would not only be impossible; it would be superfluous. We should no longer have anything to do, because we should be omnipotent; and we should only have to pronounce our fiat in order to ensure the satisfaction of all our desires and the supply of all our wants.
This classic essay by Frédéric Bastiat was recently featured at Mises.org. It was first published in 1845, as the first chapter of Bastiat’s Economic Sophisms.
Which is preferable for man and for society, abundance or scarcity?
“What!” people may exclaim. “How can there be any question about it? Has anyone ever suggested, or is it possible to maintain, that scarcity is the basis of man’s well-being?”
Yes, this has been asserted, and is maintained every day; and I do not hesitate to affirm that the theory of scarcity is the most popular by far. It is the life of conversation, of the newspapers, of books, and of political oratory; and, strange as it may seem, it is certain that political economy will have fulfilled its practical mission when it has established beyond question, and widely disseminated, this very simple proposition: “The wealth of men consists in the abundance of commodities.”
Do we not hear it said every day: “The foreigner is about to inundate us with his products?” Then we fear abundance.
Did not Mr. Saint-Cricq exclaim: “Production is excessive”? Then he feared abundance.
Do workmen break machines? Then they fear an excess of production, or abundance.
Has not Mr. Bugeaud pronounced these words: “Let bread be dear, and agriculturists will get rich”? Now, bread can only be dear because it is scarce. Therefore Mr. Bugeaud extols scarcity.
Does not Mr. d’Argout urge as an argument against sugar-growing the very productiveness of that industry? Does he not say: “Beetroot has no future, and its culture cannot be extended, because a few acres devoted to its culture in each department would supply the whole consumption of France”? Then, in his eyes, good lies in sterility, in dearth, and evil in fertility and abundance.
La Presse, Le Commerce, and the greater part of the daily papers, have one or more articles every morning to demonstrate to the legislative chamber and the government that it is sound policy to raise legislatively the price of all things by means of tariffs. And do the chamber and the government not obey the injunction? Now tariffs can raise prices only by diminishing the supply of commodities in the market! Then the journals, the chamber, and the minister put into practice the theory of scarcity, and I am justified in saying that this theory is by far the most popular.
How does it happen that in the eyes of workmen, of publicists, and statesmen abundance should appear a thing to be dreaded and scarcity advantageous? I propose to trace this illusion to its source.
We remark that a man grows richer in proportion to the return yielded by his exertions, that is to say, in proportion as he sells his commodity at a higher price. He sells at a higher price in proportion to the rarity, to the scarcity, of the article he produces. We conclude from this that, as far as he is concerned at least, scarcity enriches him. Applying successively the same reasoning to all other producers, we construct the theory of scarcity. We next proceed to apply this theory and, in order to favor producers generally, we raise prices artificially, and cause a scarcity of all commodities, by prohibition, by intervention, by the suppression of machinery, and other analogous means.
The same thing holds of abundance. We observe that when a product is plentiful, it sells at a lower price, and the producer gains less. If all producers are in the same situation, they are all poor. Therefore it is abundance that ruins society. And as theories are soon reduced to practice, we see the law struggling against the abundance of commodities.
This fallacy in its more general form may make little impression, but applied to a particular order of facts, to a certain branch of industry, to a given class of producers, it is extremely specious; and this is easily explained. It forms a syllogism that is not false, but incomplete. Now, what is true in a syllogism is always and necessarily present to the mind. But incompleteness is a negative quality, an absent datum, which it is very possible, and indeed very easy, to leave out of account.
Man produces in order to consume. He is at once producer and consumer. The reasoning I have just explained considers him only in the first of these points of view. Had the second been taken into account, it would have led to an opposite conclusion. In effect, may it not be said:
The consumer is richer in proportion as he purchases all things cheaper; and he purchases things cheaper in proportion to their abundance; therefore it is abundance that enriches him. This reasoning, extended to all consumers, leads to the theory of plenty.
It is the notion of exchange imperfectly understood that leads to these illusions. If we consider our personal interest, we recognize distinctly that it is two-sided. As sellers we have an interest in dearness, and consequently in scarcity; as buyers, in cheapness, or what amounts to the same thing, in the abundance of commodities. We cannot, then, found our reasoning on one or the other of these interests before inquiring which of the two coincides and is identified with the general and permanent interest of mankind at large.
If man were a solitary animal, if he labored exclusively for himself, if he consumed directly the fruit of his labor — in a word, if he did not exchange — the theory of scarcity would never have appeared in the world. It is too evident that in that case, abundance would be advantageous, from whatever quarter it came, whether from the result of his industry, from ingenious tools, from powerful machinery of his invention, or whether due to the fertility of the soil, the liberality of nature, or even to a mysterious invasion of products brought by the waves and left by them upon the shore. No solitary man would ever have thought that in order to encourage his labor and render it more productive, it was necessary to break in pieces the instruments that lessened it, to neutralize the fertility of the soil, or give back to the sea the good things it had brought to his door. He would perceive at once that labor is not an end, but a means; and that it would be absurd to reject the result for fear of doing injury to the means by which the result was accomplished. He would perceive that if he devotes two hours a day to providing for his wants, any circumstance (machinery, fertility, gratuitous gift, no matter what) that saves him an hour of that labor, the result remaining the same, puts that hour at his disposal, and that he can devote it to increasing his enjoyments; in short, he would see that to save labor is nothing else than progress.
But exchange disturbs our view of a truth so simple. In the social state, and with the separation of employments to which it leads, the production and consumption of a commodity are not mixed up and confounded in the same individual. Each man comes to see in his labor no longer a means but an end. In relation to each commodity, exchange creates two interests, that of the producer and that of the consumer; and these two interests are always directly opposed to each other.
It is essential to analyze them and examine their nature.
Take the case of any producer whatever, what is his immediate interest? It consists of two things; first, that the fewest possible number of persons should devote themselves to his branch of industry; second, that the greatest possible number of persons should be in quest of the article he produces. Political economy explains it more succinctly in these terms: Supply very limited, demand very extended; or, in other words still, Competition limited, demand unlimited.
What is the immediate interest of the consumer? That the supply of the product in question should be extended, and the demand restrained.
Seeing, then, that these two interests are in opposition to each other, one of them must necessarily coincide with social interests in general, and the other be antagonistic to them.
But which of them should legislation favor, as identical with the public good — if, indeed, it should favor either?
To discover this, we must inquire what would happen if the secret wishes of men were granted.
In as far as we are producers, it must be allowed that the desire of every one of us is antisocial. Are we vinedressers? It would give us no great regret if hail should shower down on all the vines in the world except our own: this is the theory of scarcity. Are we iron-masters? Our wish is that there should be no other iron in the market but our own, however much the public may be in want of it; and for no other reason than this want, keenly felt and imperfectly satisfied, shall ensure us a higher price: this is still the theory of scarcity. Are we farmers? We say with Mr. Bugeaud: Let bread be dear, that is to say, scarce, and agriculturists will thrive: always the same theory, the theory of scarcity.
Are we physicians? We cannot avoid seeing that certain physical ameliorations, improving the sanitary state of the country, the development of certain moral virtues, such as moderation and temperance, the progress of knowledge tending to enable each man to take better care of his own health, the discovery of certain simple remedies of easy application, would be so many blows to our professional success. In so far as we are physicians, then, our secret wishes would be antisocial. I do not say that physicians form these secret wishes. On the contrary, I believe they would hail with joy the discovery of a universal panacea; but they would not do this as physicians, but as men and as Christians. By a noble abnegation of self, the physician places himself in the consumer’s point of view. But as practicing a profession, from which he derives his own and his family’s subsistence, his desires, or, if you will, his interests, are antisocial.
Are we manufacturers of cotton goods? We desire to sell them at the price most profitable to ourselves. We should consent willingly to an interdict being laid on all rival manufactures; and if we could venture to give this wish public expression, or hope to realize it with some chance of success, we should attain our end, to some extent by indirect means; for example, by excluding foreign fabrics in order to diminish the supply, and thus produce, forcibly and to our profit, a scarcity of clothing.
In the same way, we might pass in review all other branches of industry, and we should always find that the producers, as such, have antisocial views. “The shopkeeper,” says Montaigne, “thrives only by the irregularities of youth; the farmer by the high price of corn, the architect by the destruction of houses, the officers of justice by lawsuits and quarrels. Ministers of religion derive their distinction and employment from our vices and our death. No physician rejoices in the health of his friends, nor soldiers in the peace of their country; and so of the rest.”
Hence it follows that if the secret wishes of each producer were realized, the world would retrograde rapidly toward barbarism. The sail would supersede steam, the oar would supersede the sail, and general traffic would be carried on by the carrier’s wagon; the latter would be superseded by the mule, and the mule by the peddler. Wool would exclude cotton, cotton in its turn would exclude wool, and so on until the dearth of all things had caused man himself to disappear from the face of the earth.
Suppose for a moment that the legislative power and the public force were placed at the disposal of Mineral’s committee, and that each member of that association had the privilege of bringing in and sanctioning a favorite law, is it difficult to divine to what sort of industrial code the public would be subjected?
If we now proceed to consider the immediate interest of the consumer, we shall find that it is in perfect harmony with the general interest, with all that the welfare of society calls for. When the purchaser goes to market he desires to find it well stocked. Let the seasons be propitious for all harvests; let inventions, more and more marvellous, bring within reach a greater and greater number of products and enjoyments; let time and labor be saved; let distances be effaced by the perfection and rapidity of transit; let the spirit of justice and of peace allow of a diminished weight of taxation; let barriers of every kind be removed — in all this the interest of the consumer runs parallel with the public interest. The consumer may push his secret wishes to a chimerical and absurd length, without these wishes becoming antagonistic to the public welfare. He may desire that food and shelter, the hearth and the roof, instruction and morality, security and peace, power and health, should be obtained without exertion and without measure, like the dust of the highways, the water of the brook, the air that we breathe; and yet the realization of his desires would not be at variance with the good of society.
It might be said that, if these wishes were granted, the work of the producer would become more and more limited, and would end with being stopped for want of sustenance. But why? Because on this extreme supposition, all imaginable wants and desires would be fully satisfied. Man, like Omnipotence, would create all things by a simple act of volition. Well, on this hypothesis, what reason should we have to regret the stoppage of industrial production?
I made the supposition not long ago of the existence of an assembly composed of workmen, each member of which, in his capacity of producer, should have the power of passing a law embodying his secret wish, and I said that the code that would emanate from that assembly would be monopoly systematized, the theory of scarcity reduced to practice.
In the same way, a chamber in which each should consult exclusively his own immediate interest as a consumer, would tend to systematize liberty, to suppress all restrictive measures, to overthrow all artificial barriers — in a word, to realize the theory of plenty.
Hence it follows:
That to consult exclusively the immediate interest of the producer is to consult an interest that is antisocial;
That to take for basis exclusively the immediate interest of the consumer would be to take for basis the general interest.
Let me enlarge on this view of the subject a little, at the risk of being prolix.
A radical antagonism exists between seller and buyer.
The former desires that the subject of the bargain should be scarce, its supply limited, and its price high.
The latter desires that it should be abundant, its supply large, and its price low.
The laws, which should be at least neutral, take the part of the seller against the buyer, of the producer against the consumer, of dearness against cheapness, of scarcity against abundance.
They proceed, if not intentionally, at least logically, on this datum: a nation is rich when it is in want of everything.
For they say, it is the producer that we must favor by securing him a good market for his product. For this purpose it is necessary to raise the price, and in order to raise the price we must restrict the supply; and to restrict the supply is to create scarcity.
Just let us suppose that at the present moment, when all these laws are in full force, we make a complete inventory, not in value but in weight, measure, volume, quantity, of all the commodities existing in the country, that are fitted to satisfy the wants and tastes of its inhabitants — corn, meat, cloth, fuel, colonial products, etc.
Suppose, again, that next day all the barriers that oppose the introduction of foreign products are removed.
Lastly, suppose that in order to test the result of this reform they proceed three months afterwards to make a new inventory.
Is it not true that there will be found in France more corn, cattle, cloth, linen, iron, coal, sugar, etc., at the date of the second than at the date of the first inventory?
So true is this that our protective tariffs have no other purpose than to hinder all these things from reaching us, to restrict the supply, and prevent low prices and abundance.
Now I would ask, Are the people who live under our laws better fed because there is less bread, meat, and sugar in the country? Are they better clothed because there is less cloth and linen? Better warmed because there is less coal? Better assisted in their labor because there are fewer tools and less iron, copper, and machinery?
But it may be said, If the foreigner inundates us with his products he will carry away our money.
And what does it matter? Men are not fed on money. They do not clothe themselves with gold, or warm themselves with silver. What does it matter whether there is more or less money in the country if there is more bread on our sideboards, more meat in our larders, more linen in our wardrobes, more firewood in our cellars.
Restrictive laws always land us in this dilemma: Either you admit that they produce scarcity, or you do not. If you admit it, you avow by the admission that you inflict on the people all the injury in your power. If you do not admit it, you deny having restricted the supply and raised prices, and consequently you deny having favored the producer.
What you do is either hurtful or profitless, injurious or ineffectual. It never can bring any useful result.