... a service is profitable if Everyman, the businessman and the final consumer, buys it. Buying it is the one indisputable way he has to show that he wants it. But Superman is unimpressed by what Everyman wants. He wishes Everyman to get what he needs. For only what he needs is "socially useful" ...
by Anthony de Jasay
In his classic essay "What is seen and what is
not seen" (written in 1848 and published in July 1850) the shamefully
underrated and neglected French economist Frédéric Bastiat (1801- 1850) declares
that what distinguishes a bad economist from a good one is that the bad one can
only see what is to be seen, while the good one also discerns the as yet unseen
consequences that are bound to follow the visible effect of an action. Present
benefits must be painfully paid for in future costs, while present sacrifices
tend to be generously rewarded in the future. The good economist must, of
course, weigh up the merits of a law, a policy or an institution by taking
account both of the effects he (and others) can see and the future consequences
he foresees (and others do not).
Stated this way, there is a built-in test that makes it very easy to tell the good economist from the bad one: we only have to watch the consequences as they emerge with the passage of time. Events will show up what the bad economist has overlooked and what the good one has correctly foretold.
Bastiat, in his summary introduction, states the problem in terms of a
choice (to change something or to keep it the way it is) and the future, as yet
unseen consequences of that choice. However, the choice also involves another,
different implication that is unseen but unlike the one that will emerge in the
future, is condemned to remain unseen. For the choice of a law, a policy or an
institution has one effect that is not seen but will be, and another namely the
future state of affairs that would have prevailed had that
choice not been made. This is the state of affairs that we forgo, that might
have come about but did not, "what we do not see" and never will. It
is what in modern economics is called opportunity cost the bad
economist tends to ignore and the good one can only approximate by educated
guesses, intelligent conjectures. Though Bastiat does not explicitly mention it
in his summary of "What is seen and what is not seen," most of his
examples also deal with "what might have been." It is probably fair
to credit Bastiat with the discovery of the concept of opportunity cost.
When by mid-2008 near-hysterical panic-mongering got the better of a
banking system that was admittedly over-extended, but that can by its very
nature not resist a collapse of confidence even if it is ever so well
capitalised to start with, governments guaranteed countless billions of bank
assets and injected into key banks countless millions of equity and loan
capital. Much of this money has since been repaid with ample interest. Some of
it remains tied up in rather messy situations, but the operation as a whole,
despite strident cries about the taxpayer having to rescue the fat cat bankers,
will probably at least break even. The banking system, though a bit shaken, was
saved. The opportunity cost—between five and ten major European banks being
temporarily unable to repay deposits (especially the large and volatile
wholesale deposits of institutions) on demand—might have been higher than the
cost of government intervention. The rescue thus looks well worth it, though
some diehard critics think letting big banks fail would have had salutary
long-run effects.
The parallel operation of propping up the economy by raising public
spending is, contrary to average opinion, less evidently justified. The major
European states will have run deficits of 8 to 12 per cent of GDP between 2008
and 2011 if not beyond. The effects on the national debt and the budgetary
strain of servicing it looks too frightening to contemplate. That problem,
however, is outside the scope of this essay.
The court of popular opinion has irrevocably judged that all the havoc,
disorder and misery is the fault of the banks and the greedy bankers running
them. Though it should know better, educated opinion has rallied to this
judgment and is busily engaged in explaining how the financial system has
caused the "crisis" and how radical "systemic change" is
needed to prevent another one before we know where we are.
Most of these reformers seem to want a tame, playing-by-the-book banking
system that turns its back on innovation, wizardry, own-account trading,
derivatives, securitisation and the financing of buyouts and corporate
wheeling-dealing. Instead, it should limit itself to the routine financing of
the production of "real", tangible goods and earn only moderate,
"morally acceptable" profits. It would be a nice research project to
try and estimate the opportunity cost of this reform programme. If it is
carried out, which the baying of the revenge-hungry renders very probable, two
functions of the system will be impaired: the smooth and audacious reallocation
of capital in response to changing profit prospects, and the reallocation of
risk from where it arises to where it is most readily borne. The opportunity
cost of the reform is the enhanced efficiency that these functions would ensure
if they were left unimpaired—an efficiency that "is not seen".
The most ominous of the reformers, however, seek reform of the financial
system not by stricter regulation and moral suasion, though they are in no wise
against these things. What they propose is a radical short cut: they want
simply to weed out the part of the financial system that is not
socially useful.
It is the gut feeling of many that the proper function of the economy is to
supply the population with wholesome home grown food, no-nonsense long-life
garments and decent housing. The rest, the services sector, is debatable.
Public services, mainly law and order, health care and what goes by the
courtesy title of "education", are more or less all right. Beyond
these, however, what is left is what an inglorious British Labour leader and
Prime Minister of the 1970s, Harold Wilson called the "candyfloss
economy". As the name tells us, it is not "socially useful". Hence
it must be a candidate for weeding out.
No lesser authority than the Governor of the Bank of England has publicly
suggested that the British financial services sector is too big and
it would be a good thing to cut it back to size. Liberal economists and
philosophers must be shaking their heads in troubled disbelief. In what sense,
in what perspective is an industry "too big" if, taking good years
with bad, it is vastly profitable and is getting bigger?
A service is profitable if Everyman, the businessman and the final
consumer, buys it. Buying it is the one indisputable way he has to show that he wants it.
But Superman is unimpressed by what Everyman wants. He wishes Everyman to get
what he needs. For only what he needs is "socially
useful".
Superman, looking on from his lofty perspective, has a shrewd idea of what
is socially useful. A true humanist, he would gladly give Everyman the chance
to help define it, but the latter can only speak by spending his euros and
dollars. That, as we have seen, merely expresses wants, not needs, and in any
case some have more of it and hence speak louder than others—on both these
counts, it just won't do. It remains for Superman to speak all by himself for
Everyman.
Superman, of course, is not only the Governor of the Bank of England, but
all those who have the supreme arrogance to assume the role, as well as the
chance or the sharp elbow to occupy the pulpit. The last time such men and
women could actually decide what was socially useful, what was to be weeded out
and what was to be fostered and expanded, was when they were members of
the Central Committee of the Communist Party of the Soviet Union. The reader
will perhaps join me in trusting that history is not getting ready, in some
less odious disguise, to repeat itself
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