Wednesday, February 1, 2012

The Unseen in Economics - Part I

The underlying, and fatal, problem of political economics was explained in exquisite detail in 1848 by Frederic Bastiat, French economist, statesman and author, in his essay "What is seen and what is not seen in political economy." Politicians and their lap-dog economists have been pretending otherwise ever since. In this first of several posts about this seminal essay, we'll unearth the foundation of ever-shifting sand that underlies the entire concept of political economics.

We'll begin by digging into Bastiat's introduction.
"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

"Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."
Condensed and modernized, Bastiat argues that any economic action has not only an immediate and predictable impact, but also delayed and often unpredictable impacts. Bad economists look no farther than the immediate and predictable impact, and fail to consider future impacts. A bad economist, therefore, is likely to promote actions that may produce immediately favorable results, but lead to problems later. To be a good economist, one must look further down the path, predict the problems and additional benefits that might accrue, and include them in the decision-making process.

Microeconomics - Individual Economic Behavior

In the field of microeconomics, the branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources, good economic decisions are a necessity. Failure to consider the total impact of an action leads inevitably to discomfort, and if unchecked, to bankruptcy.

On an individual level, it's very easy for us to understand what Bastiat was talking about. Every financial decision we make is one of choices; we choose to spend our money on this instead of that, or to save it for something else. We choose the nice chain restaurant for dinner instead of the fancy restaurant because we want to go out for drinks and dancing after. We choose the vacation upstate instead of the one in the caribbean because little Johnny starts college in the fall. We choose hamburger instead of steak at the store because we also want some veggies to go with dinner.

In each case, we are considering both the effect that can be seen and those effects which must be foreseen. We are being good economists. We choose the less-fancy dinner because we decide it maximizes our happiness by extending the evening over drinks and dancing. We choose the upstate vacation because we'll be happier in the long run with the less-fancy vacation and a son away at college. We have hamburgers on the grill instead of steaks because our long-term health, and therefore happiness, will benefit.

Certainly, other people impacted may be unaware of how we reached our decisions. Our date may not know that we chose the less-fancy restaurant to provide the opportunity for drinks and dancing afterward. We may or may not choose not to tell our children why they're eating burgers and not going surfing this year. But as the decision-makers, we've been good economists nonetheless.

Macroeconomics - Group Economic Behavior

Macroeconomics, the branch of economics which studies national, regional or global economies, is the modern equivalent term for Bastiat's term political economics. The contention of this article is that bad macroeconomic decisions are the only ones possible, because it is impossible to foresee all of the possible future impacts of policy on the economy. That which is not seen is not only unseen; it is ultimately unknowable.

That Which is Unseen1

What, then, comprises that which is not seen? Monsieur Bastiat continues the essay with his most famous parable, "The Parable of the Broken Window," which we will discuss in detail in Part II of The Unseen in Economics. In this simple parable, Bastiat introduced myriad economic truths that contributed to the foundation of modern economics. We discuss only one of those truths in this commentary; future articles will delve into others.

Briefly stated, the parable tells the tale of a shopkeeper whose careless son breaks a pane of glass. As might be expected, someone remarks that at least the glazier will benefit from the need to replace the window. Bastiat goes on to explain that because the shopkeeper must now spend six francs to replace the broken pane, he must forego the opportunity to spend that six francs on a new pair of shoes. This represents the opportunity cost of the broken window. Not only is the shopkeeper out six francs he wished to spend on shoes, but the six francs that would have gone to the cobbler has instead gone to the glazier, impacting the well-being of both the glazier and the cobbler.

In the case of the microeconomy of the shopkeeper, it's easy to determine the unseen costs of the action of his careless son; the opportunity to buy new shoes, the gain to the glazier, and the loss to the cobbler. As we illustrated in our earlier discussion of microeconomics, puzzling out the unseen costs of one particular action in a household or a business is fairly straightforward, as long as we are aware that there are unseen costs to be accounted for if we wish to be good economists.

The Limits of Analysis

But let's look beyond the microeconomy of a single household, to the macroeconomics of a nation. Consider that were every member of that economy to be taxed the six francs the shopkeeper was forced to divert from the cobbler to the glazier, there would be a similar lost opportunity, or opportunity cost, to every one of those individuals. In a nation of three hundred million individuals, such as the United States, that means that three hundred million individual decisions about how to best satisfy their own needs have been replaced by the decisions of a few men as to how the money collected is to be spent.

That which is unseen, in the case of this simple tax, is the impact that three hundred million individual decisions would have on the satisfaction of the individuals so taxed. Unseen is which individual companies, and which industries, would see reduced revenues owing to lost opportunities represented by the cancellation of those three hundred million individual decisions. Unseen are the new businesses, or perhaps new industries, that would have arisen to satisfy the demands created by those three hundred million individual decisions, were it not for the simple six franc tax.

There is no question that it would be impossible for any economist to accurately predict the impact across society of having replaced those three hundred million individual decisions with the decisions of a few men favoring a tiny fraction of the companies and industries that would have shared that income had the decisions been left in the hands of the individuals.

That is to say, it is impossible for any macroeconomist to be a good economist, by Bastiat's definition, for it is impossible for the economist to "take into account those effects that must be foreseen." The analytical task is simply beyond the capabilities of any man.

That is the underlying problem of modern political economics which was explained in 1848 by Monsieur Bastiat in his essay "What is seen and what is not seen in political economy." That is the simple truth that politicians and their lap-dog economists have kept largely swept under the rug for the last 164 years.

...and that's all I have to say about that.


1 What the Unseen is Not
Some might include in "that which is not seen" problems like the stock market crash in 1929, the DotCom bubble burst in 2000, the bursting of the housing bubble in 2007, or the upcoming burst of the higher-education bubble. There is a grain of truth in that argument, as applied to today's economic orthodoxy. In reality, these were, and will be, the unintended consequences of loose monetary policy, foreseen long before they occurred by the heterodox Austrian school of economics, yet intentionally discounted by the mainstream schools of economic thought. If you've read the Tireless Agorist's post EconStories.TV - Economic Edutainment and watched the videos there, you are aware of this dispute, which finds much of its basis in this essay of Bastiat's. If you have not, allow me to recommend it.

Author's Note: In future segments of The Unseen in Economics, we will explore "The Parable of the Broken Window" in much richer detail, buttressing the argument that it is impossible for the macroeconomist to take into account the millions of impacts that must be foreseen to make accurate economic decisions at the macroeconomic level. We will explore the economic error of aggregating millions of decisions into a few, and the impact of that aggregation on the advancement of society as a whole. And we will make the case that every macroeconomic action taken by a government must, necessarily, make not only the individuals taxed, but also the society as a whole, poorer than it would have been had those actions not been taken.

1 comment:

  1. I would like to thank you for the efforts you have made in writing this article
    nice post, that's very interesting information thanks for sharing :)
    I introduce a Economics student in Islamic University of Indonesia Yogyakarta

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