It is fitting that the Mises Institute is releasing the Bastiat Collection on the two-year anniversary of Hurricane Katrina. Though hundreds of years have passed since Frédéric Bastiat, the beauty of sound economic reasoning is that it does not change over time. In particular, his essay, “That Which is Seen, and That Which is Not Seen,” is especially insightful in analyzing the rebuilding of the Gulf Coast. In first expounding his lesson and then applying it to the conflict between the private and public sectors, this article seeks to attack the fallacies of government spending and vindicate the free market.
The Lesson
Bastiat’s lesson is essentially a vitiation of the “broken window” justification for government spending.
The story goes that a young hooligan throws a rock and breaks the cobbler’s window. When the crowd gathers, everyone scolds the boy except the economist, who instead points out that the boy has put the glazier into business. His destruction should be applauded.
The flaw here comes from that which is unseen. Though everyone sees the money spent by the cobbler to hire the glazier and then the wages that the glazier spends, what we do not see is what could have been produced otherwise. We do not see the shoes that could have been manufactured, the people whom the cobbler could have hired for more productive uses, or the resources misallocated into the repair industry. As Henry Hazlitt points out:
The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
Thus, as government spending necessarily comes from the private industry through taxation, it must divert production from the more useful means that the market demands. As the profit-and-loss mechanism directs production to the most economic ends, the market has a natural tendency to satisfy consumer demand.
Now, think of Katrina as the destructive hooligan.
What Is Seen
No one questions the need for rebuilding after Katrina, and few would go so far as the imbecilic economist to praise the hurricane, but there is still the question of who is to do the rebuilding.
With a virtually unlimited purse, the government’s approach to reconstruction is necessarily wasteful, bureaucratic, and inefficient. As Ludwig von Mises noted, the problem with bureaucracy is that consumer demand is subservient to meaningless rules, edicts, and red tape. Through this lens, it is not difficult to understand the reason behind the inefficiencies of local, state, and federal government agencies.
As USA Today notes, “The pace of rebuilding depends on who’s paying. As government work plods along, New Orleans residents are getting things done.”
The government is quick to complete some projects, like a fourteen billion dollar flood-protection system, while neglecting others, like helping to restore 20,000 of the poorest, displaced residents. How do we know that spending fourteen billion dollars was more wise than giving people shelter? Why not spend only thirteen billion? The answer is that in the absence of free-market prices, this cannot be known.
So we see the billions that the Army Corps of Engineers is spending, but what about the unseen?
What Is Unseen
Because we don’t live in a completely socialized system, we can still see glimmers of hope from the private sector. This hope is best embodied in people like Denise Thornton. Thornton, a resident of New Orleans, has used her own personal savings to rebuild her house and neighborhood, Lakewood. In stark contrast to the boarded-up firehouse of Engine 18, less than two miles away, the USA Today article reports that “[n]early 80% of the homes in affluent Lakewood have been rebuilt or reoccupied, a remarkable return rate for an area just down the road from one of the biggest levee breaches.”
Some may merely see this as the rich being better off than the poor, but that doesn’t take into account two important facts: First, who rebuilt those houses? Obviously the money spent by Thornton and others spurred employment and gave poorer people jobs. Second, Thornton is a philanthropist who founded Beacon of Hope, a non-profit charity that takes the place of the government when it comes to providing services and reconstruction to the citizens of New Orleans.
As Thornton herself says, “If disaster strikes another city, the best thing they could do is realize that the government will not do anything for you. We are in this for ourselves.”
But not only will the government not do anything to help; it will continue to tax people and thus impede recovery. This is what is unseen.
If New Orleans (or better yet, the entire country) were declared a tax-free zone, then money tied up in inefficient government spending would be allowed to flow where it is needed.
We would see the things that now remain unseen. We would see more Denise Thorntons. We would see entrepreneurs seeking profit by providing the poorest people of New Orleans with affordable housing. We would see economical levees built.
And best of all, we wouldn’t see FEMA.
