03 February 2010

De Jasay, Bastiat, and Smith

Across my desk has just come an interesting essay from Anthony de Jasay entitled "Weeding Out the 'Socially Not Useful'" (available here). As with most of de Jasay's work, it is well worth reading.

I have one small correction to make, however, regarding this claim de Jasay makes: "It is probably fair to credit [French nineteenth-century economist Frederic] Bastiat with the discovery of the concept of opportunity cost."
De Jasay is right to call Bastiat "shamefully underrated and neglected," he is right to point out that Bastiat brilliantly demonstrated the concept of opportunity cost (among many other things), and he is also right that this concept is as widely underrated and neglected as Bastiat himself is. Yet Bastiat was not the first person to discover the concept of opportunity cost. It goes back at least to Adam Smith.

In his 1776 Wealth of Nations, Smith argued that "The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of its productive labourers, or the productive powers of those labourers who had before been employed" (WN II.iii.32). By way of illustration, he goes on to discuss several historical examples of nations' wealth being dissipated or decreased, concluding:

In each of those periods, however, there was, not only much private and publick profusion, many expensive and unnecessary wars, great perversion of the annual produce from maintaining productive to maintain unproductive hands; but sometimes, in the confusion of civil discord, such absolute waste and destruction of stock, as might be supposed, not only to retard, as it certainly did, the natural accumulation of riches, but to have left the country, at the end of the period, poorer than at the beginning. (WN II.iii.35)

Note that Smith here is making a claim quite similar to the one Bastiat would make, and with far greater eloquence and rhetorical power, nearly a century later with his example of the "
broken window." What is now known as the "broken window fallacy"--the idea, which never seems to go away no matter how many times it is exploded, that destroying goods or property actually leads to an increase in wealth--is usually credited to Bastiat. And Bastiat is the first, so far as I know, to use the striking visual example specifically of a broken window. In the passage quoted from Smith, he addresses another way of destroying wealth, namely war--which many continue to think amounts to a net increase in wealth. War is a net loss; see Robert Higgs's Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity for a recent demonstration. Smith's unassuming notice of this in 1776 is one underappreciated aspect of the Wealth of Nations.

But Smith elaborates on why distortions of the "natural" flow of capital, like wars, leads to losses, even if those losses are difficult to see:

More houses would have been built, more lands would have been improved, and those which had been improved before would have been better cultivated, more manufactures would have been established, and those which had been established before would have been more extended; and to what height the real wealth and revenue of the country might, by this time, have been raised, it is not perhaps very easy even to imagine. (WN II.iii.35)

This is very close to another of Bastiat's famous contributions to the history of economic thought, namely the distinction between "what is seen" and "what is unseen." Bastiat argues that the good economist notes not only the former but also the latter, because counting
all costs, along with all benefits, is necessary to make an accurate reckoning of any economic proposal. Bastiat is justly hailed for having these insights and, especially, for expounding on them in rhetorically powerful ways. And, as I say, de Jasay is right to lament that too few people appreciate or apply these simple but true--and exceedingly timely--insights into politics and economics.

But Smith saw them first.


Ben said...

Great post, Jim. I enjoyed it very much.

Matthew Hisrich said...

Excellent point - thanks for sharing! I have posted a link to your post on the Anthony de Jasay group on Facebook.

As for Jasay's name, I thought you might be interested in this note from Hugh Brogan's biography of Alexis de Tocqueville - he's a bit harsh, but makes a point of his own: "Americans were so impressed by the noble particule and so unaware of French usage that they almost invariably referred to AT as 'De Tocqueville' until after the Second World War; and the practice has not entirely died out, even today."

I haven't checked with Jasay, but I would think the same issue may apply to his name. In any case, thanks again!