Classical Economics, Lecture 6

1. Classical Economics, Lecture 6 Bastiat and the Laissez-Faire School

2. Two Themes • This chapter has a discussion of a lot of people, but two central themes tie the chapter together. • Rothbard contrasts English economics unfavorably with French economics. French economics was subjectivist and consistently laissez-faire. English economics was compromising and muddled.

3. Two Themes Continued • English economics remained under the influence of Mill. Even after the subjectivist revolution of the 1870s, English economics retained some cost-of-production elements from Mill. • Mill often supported free market measures, but in a compromising way. He made room for labor union activity to increase wages. He was also sympathetic to a form of socialism as an ideal.

4. Criticism of Hayek • Rothbard is here implicitly challenging a famous essay by Hayek, “Individualism: True and False”. • Hayek contrasted French liberalism, which was dogmatic and Cartesian, with English liberalism, based on compromise and tradition. Rothbard thinks that the French way of doing things was better.

5. The Second Theme • The end of the 19th and the beginning and middle of the 20th centuries were marked by increasing statism. • The period 1850-1870 was different. There was an international movement in favor of classical liberalism.

6. Bastiat • Frédéric Bastiat (1801-1850) was the most famous French laissez-faire economist, but he wasn’t alone. • Rothbard discusses many other people who were allied with him, such as Charles Comte and Charles Dunoyer. These French writers were in the tradition of J.B. Say rather than Adam Smith. Note that Rothbard never confines himself to discussing just a few central people.

7. The Broken Window Fallacy • One of Bastiat’s most famous essays discusses the broken window fallacy. Rothbard treats this essay as a refutation of a proto-Keynesian view of economics. • In story, a boy hurls a brick through a store window. The common sense reaction is that the boy’s activity is destructive. There has been a net loss of wealth in society, i.e., the broken window.

8. Broken Window Continued • A second-level of thought now comes in. Someone claims that the boy’s activity wasn’t destructive. Because the window is broken, the store owner has to buy a new window. His spending will help the glazier. In turn, the glazier will spend the money on other things and this will spread prosperity and employment through the economy.

9. More Broken Window • What’s wrong with this? It’s true that the store owner spends money to repair the broken window, and this generates income and employment. • But if the window hadn’t been broken the store owner would have spent the money on something else or saved it. The broken window produces no net gain and there is a loss---the broken window itself.

10. The Broken Window and Keynes • You might think that the broken window fallacy is so obvious that no one would really commit it. • It is in fact the basis of at least one version of Keynesian economics. E.g., Paul Krugman says that to get the economy going, the government has to spend more. Krugman actually said that the destruction of the World Trade Center in 2001 would have economic benefits But—leaving increases in the money supply aside—wouldn’t this be diverting spending from other things? • .

11. The Keynesian Answer • The Keynesians respond that sometimes, the broken window reasoning works. In a time of depression and unemployment, the alternative to government spending may not be spending on something else. People might not have spent their money on anything. It could be hoarded, as people wait for prices to fall further. There can be a downward spiral.

12. Answer Continued • The dispute between the Keynesians and their opponents is one that we have studied before. • This is same as the argument over Say’s law. Defenders of Say’s law say that saving money does not alter the fact that there can’t be a general over-production. If money is hoarded, it will rise in value and eventually, it will be spent. • This is called the real-balance or Pigou effect.

13. Bastiat as a Theorist • Some people dismiss Bastiat as just a pamphleteer. Marx was very derogatory about Bastiat. • Rothbard and Hayek rate him highly. • In contrast to Adam Smith’s emphasis on production, Bastiat stressed exchange. Each person who engages in exchange expects to benefit.

14. Goods and Services • Bastiat rejected the distinction between productive labor on material goods and unproductive labor on services. This also comes from Adam Smith. • For Bastiat, all goods are services. What people want is not the physical good itself, but the satisfaction the good provides. • Bastiat’s formula was “Wants-Effort-Satisfaction”. He stressed consumption as the goal of economic activity

15. Bastiat and Free Trade • Bastiat was the greatest popular defender of free trade. His “Petition of the Candle makers” made fun of the efforts of protectionists to restrict production in order to advance their own interests. • Here the candlemakers protested against the unfair competition they got from the sun.

16. Free Trade Continued • Bastiat was more than just a writer about free trade. • He was an active influence in French politics and a member of the French Constituent Assembly and Legislative Assembly after the Revolution of 1848. He was a good friend of Richard Cobden, who later, in 1860, negotiated a trade treaty with France. • Bastiat influenced people all over Europe. In Prussia, John Prince Smith led a classical liberal and free trade movement.

17. The Law • Bastiat’s pamphlet The Law (1850) is an important contribution to libertarian political theory. • Bastiat says that the state can’t acquire new rights that individuals don’t have. Persons can delegate to the state, e.g., their right to protect themselves; but the state can’t do anything that individuals couldn’t do in a state of nature.

18. The Law Continued • Bastiat also criticizes socialists and planners for wanting to control society. They want to impose their values on others. This is a precursor to Road to Serfdom.

19. Molinari • The Belgian Gustave de Molinari (1819-1912) lived most of his life in France and was associated with the French classical liberals. • He said, if free competition is good, why not competition among protection agencies? He defended anarcho-capitalism.

20. Dunoyer’s Response • The French classical liberals thought Molinari’s proposal was too radical but they didn’t discuss it very much. • Charles Dunoyer did discuss it. He objected that competing agencies would get into violent fights. • Don’t nations already do this? Also, agencies would have an incentive to agree. • Despite their disagreements, the French classical liberals respected Molinari.

21. Pareto • Vilfredo Pareto (1848-1923) was strongly influenced by Molinari. • He adopted the French libertarian class theory. Protectionism and other restrictionist measures were ways some groups, with the help of the state, could act as predators on others. • He viewed the state as predatory, like Oppenheimer and Nock later.

22. Pareto Continued • After the move toward statism in the 1870s, Pareto became cynical. He became less of a political advocate and more of a detached scientific observer. • He analyzed the motives of various social movements. • He ended as a supporter of Mussolini.