Monday, January 9, 2012

Bastiat Was a Genius

I've thougth about trying to put all this down in writing for a long time. It has always seemed like such a jumble of concepts that it is difficult to comb them straight. But, I think that if I use a concept that Bastiat discusses in "That Which is Seen, and That Which is Not Seen," commonly know as the "Broken Window Parable," I can make this reasonably short and straigth forward. Bastiat's parable speaks directly to this issue. And, I think he make very good sense. (

The concept Bastiat uses is the idea of an estate. He doesn't use the word, but, the writing has the idea running through it. An estate is that collection of durable items or things which an individual truly ownes. I think it can even include intangibles, like an education (but, that is beside the point).

We are all concerned with providing for ourselves and our loved ones. So, we want to grown our stores of durable valuable stuff. The larger that collection gets and the more secure the owner feels about that collection, the more likely the owner is to be willing to risk some of it. We all, naturally, try to increase the value of our estate. We each have our individual estates. There is also, the aggregate national estate, our corporate saved wealth.

The beauty of capitalism is that it allows two separate estates to voluntarily come to an understanding of mutual benefit and trade part of their estates. That 'mutual benefit' thing means both parties estates increase in value as a result of the transaction.

I think in Bastiat's opinion, and in mine, that trick of identifying and pursuing transactions of mutual benefit is the most efficient way to move capital, or value around an economy. Every time there is a move, the values of estates are increased.

Obviously, this is idealized. Some attempts at some transactions of mutual benefit fail. But, at least, in the realm of such transactions, there is the possibility of success. Some large portion of these attempted transactions will result in increased values of the two estates.

Our economy is the aggregation of many millions, maybe billions, of such transactions. Each tiny transaction potentially increases the value of the aggregate national estate. This increase is measure annually as GDP, the gross increase in the value of our national estate.

Unemployment insurance, the forced taking of value from one estate to pay to maintain another, thus, lacks half of the potential benefit. One estate sees benefit in the transaction, but, the other sees none. It is necessarily one sided.

While I agree with the offering of unemployment insurance to those who have lost jobs, I see it purely as a humanitarian dynamic. It completely lacks this idea of mutual benefit. He who must give up part of his estate to pay unemployment benefits has no hope of seeing his estate increase in value as a result of that transaction. There may be some partial pay back or circular path through multiple other transactions, through which he may see some repayment via the state of the general economy. But, there is no hope that his entire cost will be repayed, much less, will he make a profit on the transaction.

For me, every transaction should be compared to that ideal mutually beneficial transaction. Both parties, or all parties involved, ideally will improve their condition. Anytime we force, via gov't policy, a class of transactions that fall short of this ideal, we should be very clear that we are not growing the corporate national estate (the aggregate of all our individual estates). Instead, we are, at least, inhibiting its growth and, probably worse, we're engineering into the system a disincentive to performance which ends in a shrinking national estate.

Further, as we take value from estates that are sound and performing well, we shrink or, at least inhibit the growth of those estates. Consequently, those estates will percieve more risk in their environment and will naturally become more conservative in their dealings. So, I argue that the alleged improvement (or, forestalling of slow down) in the general economy that might be achieved by paying the unemployed is largely offset by the tightening of the purse strings by estates that might otherwise be willing to spend.