Superman is unimpressed by what Everyman wants
by Anthony de Jasay
... 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" ...
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)1 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.
Footnotes
1. Bastiat's essay, "What Is Seen and What Is Not
Seen," is available at the Library of Economics and
Liberty. See also the material on and by Bastiat at the Online Library of
Liberty http://oll.libertyfund.org/person/25 and at the
Library of Economics and Liberty http://www.econlib.org/library/classicsauB.html#bastiat. For biographies
of Bastiat, see Frédéric Bastiat in the Concise
Encyclopedia of Economics and "An Annotated Bibliography of
Frédéric Bastiat"by Sheldon Richman. A Bastiat timeline prepared by
David M. Hart is available at http://files.libertyfund.org/img/Bastiat.pdf.
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