Frederic Bastiat On Troops, Henry Hazlitt on Bureaucrats11th March 2013

Last week we introduced the great French economic philosopher, Frederic Bastiat, and his Broken Window, which goes to the root of the current problems with our bodies economic and politic, and perhaps much of human thought. I promised to pick up with more of his erudite thoughts, and so here we go …

Remember that Bastiat was born in 1801, and even though he died young, of tuberculosis in 1850, he lived through an era of revolution, anarchy, authoritarianism, monarchy and republic. With all this first-hand experience, he recorded some remarkably concise arguments on the economic fallacies that we have chosen to lumber ourselves with today, and emphasised the importance of foresight in considering the unintended consequences of any act, habit, institution or law. Read on to see how this is of great relevance today.

Troops …

Every nation state sees security as one of its fundamental attributes, and that means an army, of which Bastiat fully approved, as he saw security as an enjoyment, albeit one that is achieved by a sacrifice, as the cost of the standing army is borne through taxation. This is well covered in his book “Ce qu’on voit et ce qu’on ne voit pas” (or to you and me, “What is Seen and What is Unseen”), from which I have taken extracts below.

In Bastiat’s era soldiers were very much an everyday experience, but the challenge came when someone suggested disbanding many of these troops. The contrary arguments are easy: “Do you know what you are saying? What will become of them? Where will they get a living? Don’t you know that work is scarce everywhere? Would you turn them out to increase competition and drive down wages? … the army consumes wine, arms, clothing … promotes the activity of manufacturers in garrison towns …. Why, any one must tremble at the bare idea of doing away with this immense industrial movement!”

“The error begins”, he went on, “when the sacrifice [taxation] itself is said to be an advantage because it profits somebody”. What is unseen is not the one man that has lost his job, but the thousand who supported his employment who are now free to engage him in different and potentially more productive employment.

Bastiat broke things down to village level, where the recruiting sergeants arrive and take off a man. The tax-gatherers then arrive and take off a thousand francs, which are required to support that man in arms for a year at the garrison town. But what about the village? The village has lost an able worker, and the thousand francs that would have supported his labour, and the productive activity which he would have performed, and the investment and consumption that could have been achieved with that money.

Henry Hazlitt, who we also mentioned last week, published his brilliant book “Economics in One Lesson” in 1946, applying Bastiat’s thinking to the post WW2 disbandment of troops. Whilst recognizing that when millions are released from service it may take time for private industry to reabsorb them, the fears of unemployment arise because we tend to look only at one side of the process. We forget that civilian demand will benefit from the consequent reduction in taxes, providing natural employment to the former soldiers, so that they become not people supported by the state, but self-supporting individuals generating production in goods and services that meet the real needs and demands of the populace.

As an aside, but most topical as we are in Budget week, Hazlitt pointed out that if the troops were supported not by taxation, but by a budget deficit, then why is a deficit supporting troops any better than a deficit supporting tax cuts to re-integrate former troops into the community? Today, if our country needs tax cuts to get moving, why can’t we do so whilst in deficit?

Bureaucrats …

Hazlitt went on to apply the thinking on Troops to the issue of Bureaucrats, writing “Whenever any effort is made to cut down the number of unnecessary officeholders the cry is certain to be raised that this action is deflationary: “Would you remove the purchasing power from these officials? Would you injure the landlords and tradesmen who depend on that purchasing power? You are simply cutting down the national income and helping to bring about or intensify a depression”! You see, just like today and all the trauma over affecting GDP, dips, double dips, triple dips, and for all we know quadruple dips.

Sure, few of us like change, but what is unseen is that the taxpayers now retain more of their income and purchasing power, and as the real production of goods and services increases, for which real demand exists, it rises again. This is real economic stimulation rather than artificial stimulation, as it is based on genuine demand, both from the UK and overseas, that individual people and organisations decide to willingly pay for, rather than what a politician determines is right for us.

Hazlitt stressed that he saw many public services – from the policemen, firemen (his book was written before the days of general female employment in these trades) street cleaners, health officers, judges, legislators and executives – as making it possible for private industry to function in an atmosphere of law, order, freedom and peace. But he went on to say that their justification consists in the “utility of their services”, not because of the “purchasing power” they possess by virtue of being on the public payroll.

In fact he compared the “purchasing power” argument applied to that of a racketeer or a thief: “After he takes your money he has more purchasing power. He supports with it bars, restaurants, night clubs, tailors, perhaps automobile workers. But for every job his spending provided, your own spending must provide one less, because you have much less to spend.” I think we can see what his opinion of bank bailouts would have been.

And today?

So are Bureaucrats the 20th Century equivalent of 19th Century troops? And what burden will be invented for the 21st Century, or will be loosen the choke?

There is one problem with applying Bastiat’s and Hazlitt’s arguments to our modern world. They suppose that government will cease levying taxes on villagers when the army is reduced, or cut taxes when bureaucrats are laid off. The logic is obvious, but sadly less obvious to our legislators. So men return to the village, but there is no reduction in tax, and rural unemployment is the natural consequence, whilst largesse continues in the chosen city around the central government.

I came across two startling statistics about such a central government city, Washington DC. First, that house prices hardly corrected there[1], (by 5.5% from the peak, whilst the US has seen a national decline of 16.5%, and the worst, Las Vegas, a 60% decline).  Secondly when Sky News reported the most extreme 2012 election result across the US, it was Washington DC, with over 90% voting for the incumbent, against a national result of 51%.[2]

As if anticipating this potential for a self-serving mindset, Hazlitt went a stage further, using a lovely turn of phrase: “We are lucky, indeed, if the needless bureaucrats are more easygoing loafers. They are more likely today to be energetic reformers busily discouraging and disrupting production.” So it seems they had a surfeit of business regulators even then, who were failing to consider the unseen consequences of their actions.

If only Gus O’Donnell, the former cabinet secretary, who has spent at least part of his retirement promoting bureaucrats on radio and in the Financial Times, had read a little Bastiat or Hazlitt as a young man, he may have formed a fully balanced view. (And in the interests of balance, if you have an FT subscription you can read his recent article here: “There is no shame in being a bureaucrat”).

Mr O’Donnell, one does not wish to demean Bureaucrats, in fact I know quite a few local bureaucrats who work diligently and tirelessly for the economic benefit of their community within the constraints imposed upon them. As you point out in your FT article, perhaps the answer is fewer politicians and more bureaucrats. This is tempting, although another option is both fewer politicians and fewer bureaucrats. If that means less taxation and regulation, that is something of which both Bastiat and Hazlitt would approve.

As we have seen, on the one hand bureaucrats are most desirable whilst they provide a positive “utility of service”, but like everything in life, it seems one can sometimes have too much of a good thing.

[1] See http://forecast-chart.com/house-price-dc.html, now shows a 5.5% decline from the peak with growth recommencing in 2010, compared to a 16.5% decline nationwide, a decline which only flattened out in 2012.

[2] See http://elections.mytimetovote.com/results/washington_dc-2012.html. To understand how extreme this was, the second highest was a full 20% lower, Hawaii at 71%, which itself was 20% higher than the national result. The previous five Presidential elections showed similar extremes in Washington DC of 85% or more voting in favour of the Democratic candidate. As a disinterested Brit I make no comment on any party or their opponents, but such a consistently dramatic result suggests there is a major gulf between those with the most direct economic dependence on central government and those further afield.