This is the 38th installment of my weekly column for Mint, Thinking it Through.
A few days ago, I was fortunate enough to win the 2007 Frédéric Bastiat Prize for Journalism. I picked up a handsome cheque and an engraved candlestick at a ceremony in Manhattan, and reflected that much as I valued the money and would cherish the candlestick, I would have been happier if the writings that made me eligible for this award had been unnecessary. The Bastiat Prize, according to its organizers, is meant for “journalists whose writings wittily and eloquently explain, promote and defend the principles of the free society.” In the India of my dreams, I would not need to do those things.
Frédéric Bastiat was a French essayist who lived in the first half of the 19th century. His ideas, however, are terribly relevant to modern India. Indeed, if his work had been widely read and understood by the men who brought us freedom and shaped our nation after independence, we would not be such a poor country. Virtually every mistake that independent India’s policymakers made in the economic sphere could have been avoided if they had just read his great essay, That Which is Seen, and That Which is Not Seen.
It begins: “In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other… both of the effects which are seen, and also of those which it is necessary to foresee.”
To illustrate the difference between what is seen (and that a bad economist notices) and what is not seen (that a good economist foresees) Bastiat gives us the parable of the broken window. Imagine that a young boy breaks a shopkeeper’s window. At first onlookers commiserate with the shopkeeper, but then they point out that this is actually good for the economy. After all, the glazier will get 6 francs for repairing the window, and he might spend it on various goods and services, which would benefit the producers of those, and so on.
But this is bad economics. A good economist would also consider the hidden costs of the broken window. Had the shopkeeper not spent 6 francs on repairing the window, he would have spent it on something else, bringing the same benefits to the economy as the glazier’s spending that money. While the glazier’s spending is seen, the spending not done by the shopkeeper is not seen. One man’s loss equals the other man’s gain—and the economy, as a whole, loses the value of the broken window.
This seems commonsensical, doesn’t it? And yet, economists and politicians commit the Broken Window Fallacy all the time, such as when they say war is good for the economy, or when they talk about the economic benefits of Hurricane Katrina or 9/11—or of government spending.
When the government spends money, the bad economist extols the good that the spending does. The good economist sees the price that the taxpayer pays. Bastiat writes: “You compare the nation, perhaps, to a parched tract of land, and the tax to a fertilizing rain. Be it so. But you ought also to ask yourself where are the sources of this rain and whether it is not the tax itself which draws away the moisture from the ground and dries it up?”
Indeed, all government spending carries hidden costs, for not only do taxpayers lose the money that the government forces them to part with, they are also disincentivized from working harder or expanding their businesses. Society is at a loss for this. And yet, India’s economy, since independence, has been based on a massive mai-baap government, growing like a hungry beast at our expense.
Protectionist policies—subsidies, tariffs and various market barriers—are another example of ignoring what is not seen (the cost that consumers bear) for what is seen (the benefit that accrues to producers). To illustrate this, Bastiat wrote the magnificent satire, The Candlemakers’ Petition, in which candlemakers petition the French government for protection against competition from the sun.
When Sonia Gandhi wrote a letter to Manmohan Singh earlier this year warning him that foreign investment would threaten small kirana shops, she was petitioning for candlemakers. Indian newspapers do the same when they oppose foreign investment in media. Every powerful business group or lobby tries to block out the sun, as does the government. And who is left in darkness? We are.
I could go on and on, but Bastiat, the master of the crisp, lucid elucidation, would not approve. So I shall end here. To read Bastiat’s writings, do check out http://bastiat.org. It will all seem so familiar.
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You can browse through all my columns for Mint in my Thinking it Through archives.