Economic Harmonies: Chapter 6 Review – Accounting For Wealth

Applying The Seen And The Unseen To Matters Of Accounting For Wealth.

By Scott Albright

When the bemoaning of cheap consumer goods, trade deficits and of displacements of workers due to newer capital investments in both industrial production and various services in general are coupled with a heavy embracing of the belief that aggregate spending and “production” in the general abstract sense are what determine the health of an economy (i.e., as measured by GDP, regardless of how much so called production is in response to consumer demand or of the hegemonic rule of state planners), and this view is still alive 170 years after Bastiat wrote the Harmonies, is it any wonder that the campaign logo “Make America Great Again” was both sported and sentimentally so alluring to so many President Trump supporters last year?

The tendency of trade protectionists and economic nationalists to view property rights in a quasi-nationalist construct, seeing unemployment of domestic laborers as inherently bad, regardless of the interests of producers, investors, entrepreneurs, is dismissive of the bigger picture effects in international trade. Even if growing international trade deficits mean that more former domestic laborers are laid off, and are now employed or employable only at lower wages, it also means that laborers in other nations who’s said labor is outsourced for goods that we formerly produced, are now competitive enough to produce goods that will inevitably free up our labor to be available for other lines of employment.

Bastiat’s use of the term real wealth was very helpful in this chapter so that the reader doesn’t lose sight of the interest of the consumers, even when certain producers endure losses and have to go under.

“From the point of view of our satisfactions, that is, as far as our real wealth is concerned, we are as much enriched by the value that we have lost through progress in the means of production as by the value that we still possess.

In the transactions of everyday life we no longer take utility into account, in so far as, through the decrease in value, it becomes free of charge. Why? Because what is free of charge is common to all, and what is a common possession has no effect on each person’s individual share of the total real wealth. No exchange is made of what is held by all in common; and since, in business transactions, we need to know only that proportion which is constituted by value, that is all we concern ourselves with.” [1]

This goes back to the seen and the unseen. We must be very careful in our analysis to separate not just value and utility, as we learned from the chapter five review, but here to know that with production losses, trade deficits or labor being dislocated, not to miss the interests of consumers being served. Bastiat’s insight is very keen and from the beginning of the chapter he lays out the foundation of what we need to always observe.

“…for if we identify wealth (meaning the real, effective level of our material comforts) with value, if in particular, we affirm that wealth and value are in direct proportion to each other, we run the risk of putting our economic thinking on the wrong track. The works of second-rate economists and of the socialists prove this only too well. … and we expose our minds to the greatest of all dangers-that of becoming involved in a petitio principii in which we assume as true what we are trying to prove, of looking at political economy backwards and constantly confusing the goal that we wish to reach with the obstacle that blocks our way.” [2]

And by exposing our minds to said dangers, we inherently feed the notion of business losses/bankruptcies, outsourced various stages of production, as being inherently bad or undesirable, but missing the forest through the trees in not looking for the changing patterns of consumer demand which result from newer, more innovative methods of production as capital investment/accumulation increases enabling a much more productive labor force and higher standards of living, more leisure and time freed up to pursue other things on your value scale, so to speak.

Wealth is a topic that is often undesirable for many to talk about possibly because of various ideals and their shortfalls, experiences in obtaining it maybe failing, as well as large differentials in monetary wealth being a cause of anxiety when its between you and family members or friends, the so called “keeping up with the Jones’s mentality”, among other reasons, but the debate, particularly among economists, as to what is the best measurement for it goes back very far and will never be fully agreed upon with a consensus, but even in Bastiat’s last days of writing the Harmonies, the pre-Keynesians, so to speak, were alive and kicking, with a degree of political power too!

“This is indeed a treacherous shoal for the political economist. Is wealth to be measured by the satisfactions achieved or by the values created?

If there were no obstacles between utilities and wants, there would be no efforts, services, values, any more than there are for God; and, while measuring wealth in terms of satisfactions, mankind would be in possession of infinite wealth; yet in terms of value, it would have no wealth at all. Thus, two economists, according to the definition they choose, might say: Mankind is infinitely rich, or Mankind is infinitely poor.

The infinite, it is true, is in no respect an attribute of humanity. But mankind is never static; it always moves in some direction; it exerts efforts; it exhibits tendencies; it gravitates toward steadily increasing wealth or steadily increasing poverty. Now, how can political economists come to a common understanding, if this successive reduction of effort in relation to satisfaction, of pains to be taken or rewarded, that is, value, is considered by some an advance toward wealth and by others a descent into poverty.”[3]

These last two paragraphs remind me of the common belief of what a “post-scarcity” world may resemble; all utility, no value; a Jetson’s or Star Trek-like Sci-Fi, where everything is like an economy on demand. This isn’t possible because of the progressive, ever changing nature of man’s wants, desires, and this is seen in patterns of change in consumer demand, or just in the transition long ago from an agricultural to an industrial society in general. Instead of 80 percent of the able-bodied work force needing to work on a farm, the continual accumulation of capital goods (i.e., the John Deere tractor) and more innovative methods of production being employed and continually improved upon, you freed up enough labor that could move to the city and work in industry, where more options became available than being a farmhand. This very change in the nature of man’s wants will always necessarily mean that there will be obstacles to overcome, value in said services employed (and then exchanged) in overcoming the obstacles.

To believe mankind is infinitely poor in such a scenario just because there is very little labor necessary to obtain the goods and services one desires is blindly dismissing the differences between value and utility.

The widespread differences in ideologies regarding economic well being do have implications on public policy, and Bastiat was very wise to point them out in his chapter on wealth here. The ignorance of economics is pervasive now, as it was then in 1840s Europe. As they say, there is nothing new under the sun.

“Yet if the difficulty merely concerned economists, we could say: Let them have their arguments. But legislators and governments are daily required to take measures that exercise a very real influence over human affairs. And what a plight we are in if these measures are taken in ignorance so complete that wealth cannot be distinguished from poverty!

So, I make this declaration: The theory that defines wealth in terms of value is, in the last analysis, a mere glorification of the role of obstacles. It rests on the following syllogism: Wealth is proportional to value, value to effort, effort to obstacles; therefore, wealth is proportional to obstacles.

I make this further declaration: Because of the division of labor, which assigns every man to a trade or a profession, this illusion is very difficult to destroy. We all live by the services that we render in overcoming obstacles, satisfying wants, or removing pain: the doctor by combating disease; the farmer, hunger; the textile manufacturer, cold; the carriage-maker, distance; the lawyer, injustice; the soldier, danger to the country; and so complete is the list that there is not a single obstacle whose elimination would not seem most inopportune and most inconvenient to someone, and even disastrous to society at large, since it would appear that a source of services, value, and wealth was to be destroyed. Very few economists have completely resisted this false notion, and, if political economy ever succeeds in dispelling it, on that score alone its practical mission in the world will have been accomplished; for I now make this third declaration: Our public policy is steeped in this notion, and whenever governments feel obliged to make special concessions to some class, profession, or industry, they follow no other procedure than to erect obstacles designed to encourage the development of a certain type of efforts, in order to increase artificially the number of services society will be obliged to call for, and thus to increase value, and supposedly, wealth.” [4]

The two primary economists that Bastiat exposes the errors of in this chapter are Jean Charles Leonard de Sismondi and Auguste, Vicomte de Saint Chamans. They were both sympathetic to Keynesian thought, techno phobic and protectionist policies. In what they believed was the states role to uphold value wealth and obstruct anything that benefits consumer wealth is unfortunately still alive and well today.

Bastiat’s highlighting of Saint-Chamans excerpts from his book Nouvel essai sur la richesse des nations (1824) reveal the weaknesses in its economic ignorance yet these same ignorant errors have an anchoring ideologically in statist policies today.

“A nation has two kinds of wealth,” he says. “If we consider only useful commodities from the point of view of their quantity, their supply, we deal with wealth that procures society things that it can consume, and this I shall therefore term consumers’ wealth.

“If we consider commodities from the point of view of their exchangeable value, or simply their value, we deal with wealth that brings society value, and this I therefore term value wealth.

“Political economy deals primarily with value wealth; and it is with it primarily that government may properly deal.” …

…Does exchange make it easier for men to acquire more consumers’ wealth for less value wealth? Then we must restrain exchange. …

…We must not neglect the opportunity, for it is obvious, that if machines increase consumers’ wealth, they decrease value wealth.” Let us bless the obstacles that the high cost of fuel in our country puts in the way of the multiplication of steam engines.” [5]

The fallacies here are numerous but we’ll focus on the central one of the assumption of seen loss of value in producing a good, say, because of less labor used to yield a given level of output. What is unseen is that this is usually because of labor being more productive and freed up from older, less productive methods or that there is outsourced labor that is now competitive enough to relieve domestic workers of the former line of work. Because laborers are now more free to pursue other lines of employment, there is still more value wealth (in Saint Chamans terminology) to be created.

Innovations in capital investment and methods of production create far more jobs than they kill, we will see that in later chapters more clearly. Plus, the fact that consumers can enjoy more goods, often cheaper, and doing so in voluntarily purchasing from producers who employ more innovative capital goods and tools, machinery, shows the merits of voluntary exchange through property rights, regardless of the source of any law that attempts to restrain it.

In my personal opinion, the two quotes from Saint Chamans that are most dangerous in fueling economic errors are ones that clearly illogical but yet give so much rise to what’s the underpinning logic of how to cure today’s recessions.

“If taxes confiscate money from areas where it is plentiful, in order to allocate it to areas where it is scarce, they serve a useful purpose, and this action, far from representing a loss to the state, represents a gain.” …

… “Luxury and extravagance, so disastrous to the wealth of private individuals, are advantageous to the wealth of the nation.” [6]

This is a very utilitarian yet illogical belief that counter cyclical intervention can cure depressions, and it is still alive and strong today.

If Mises’ story of the master builder is any guide, then distortions in time preference, saving and investment, due to fallacious approaches of increasing aggregate demand and spending when the economy needs more savings and specifically production in lines that are sustainable, guided by proper incentives through the price system so there can be full dissemination of market signals for producers to properly respond to consumer demand (not the whims of central planners “ideal” or “social utility maximizing” utopia), then Saint Chamans had it entirely backwards!

The clamor against economic growth expressed by Saint Chamans and Sismondi is essentially no different today than it was in their time, but we must not forget that monetary factors are not everything, and that psychic profit has other determinants, and I believe Bastiat may have been a little dismissive of them in this chapter as well. In chapter five review I pointed this out but here it resurfaces and is important to bring to light.

“For once again, utility is, for man, the good side of the coin; value, the bad side. Utility relates only to our satisfactions; value, to the pains we take. Utility makes possible our satisfactions and is in proportion to them; value indicates our innate infirmity, is created by obstacles, and is in proportion to them.” [7]

I believe Bastiat may have been a little dismissive here of the psychic profit obtained from labor in and of itself, which is real and observable (ex. Amish desiring more primitive methods of production), as is the psychic disutility of forgone leisure (ex. not desiring overtime even when it is available for you).

We must remember that economic nationalist/protectionist sympathizing (not necessarily Luddites) quasi techno phobic laborers whom are afraid of A.I. and nanotechnology in so far as their own job security in their current specific line of employment would rather keep their current job than have to retrain themselves to be more employable after the implementation of more A.I. The same could be said about those who would rather pay higher prices for domestic goods even when there are competing imports that are cheaper.

The point here once again, is to note that not everyone desires solely monetary gain and this same reasoning is used at the larger, national level by those who would rather have domestically produced goods in their line of production or labor, than to compete with world producers/laborers. Once these reasons entail a violation of private property rights and free exchange (such as a tariff, subsidy, or import quota), you necessarily violate the liberty of others and the NAP at that, and are involved in illegitimate yet often legal plunder.

Bastiat’s contrasting of effective wealth and relative wealth at the end of the chapter is crucial in combating the progressive anti-capitalist attempt to undermine property rights and voluntary exchange in the name of inequality. Semantics do matter and these terms that Bastiat used will go far in our analysis.

“Let us state as a conclusion, then, that we may give, and give legitimately, two meanings to the word “wealth”:

            Effective Wealth, real wealth, which produces satisfactions, that is, the sum of the utilities that human labor, with Nature’s help, puts at society’s disposal.

            Relative Wealth, that is, each individual’s share in the general wealth, which share is determined by value.

Here, then, is the harmonious law that can be expressed thus: Through labor the action of man is combined with the action of Nature.

From this cooperation utility results.

Each individual takes from the general store of utility in proportion to the services that he renders-in the last analysis, then, in proportion to the utility he himself represents.” [8]

Assuming all exchange is voluntary, I agree with this law. The Relative Wealth is important for our analysis, because this is where the inequality hucksters, trade protectionists, and Keynesians believe respectively that our relative wealth is in jeopardy if we have growth in:

  1. income gaps between rich and poor
  2. trade deficits with other nations
  3. savings combined with a drop in spending

Once again, utilizing the seen and the unseen, these same critics forget that the poor are able to live as well as they can because of all the inventors, innovators, risk taking entrepreneurs have the capital saved to invest in the production of capital goods that make us all better off, especially the poorest, in terms of living standards an the productivity of workers.

Because more and more nations can produce the toys, clothing, apparel, certain car parts or parts of capital/producer goods, domestic labor is relieved to perform services in trades that are newer but in high demand and that we have a more comparative advantage in.

And last, but not least, the rebuttal to the Keynesian fallacies, if we are able to save more of our income and choose to do so, lowering our time preferences (desiring the consumption of more goods/services at a later date than the consumption of lesser of them but now/sooner), the pool of loan able funds for banks, lenders, financial institutions grow, enabling more investment for further production of capital goods. Can we really “spend our way to prosperity”? What if we saved 0 % and consumed everything that we earned? Once you employ the reductio ad absurdum of the base of their ideology, the flaws are all too clear.

The belief by some that the interests of consumers are inherently at odds with those of the producers is rebutted more extensively in Chapter 11 of the Harmonies which we will get to the review later in 2018. There are some very illustrative graphs and charts illustrating the harmony of interests between consumers and producers that will serve as guides for why the tendency of value lost in production can be simultaneously accompanied by gains in observable utility.

Next, chapter seven review is a very crucial one because of it’s implications on praxeology, and the method of deductive reasoning in arriving at economic principles. We will see once again how the prescient Bastiat knew these principles both implicitly and explicitly, well before the common terminology was known and specifically used.

[1] Bastiat, Frederic. Economic Harmonies, p. 157, The Foundation for Economic Education, 1996

[2] Ibid, p. 158

[3]Ibid, p. 159

[4] Ibid, p.159-60

[5] Ibid, p. 161-62

[6] Ibid, p. 162

[7] Ibid, p. 167

[8] Ibid, p. 170

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