Saturday, December 6, 2008

Economics in One Lesson, or That Which Is Seen, and That Which Is Not Seen

In the 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 takes account both of the effects which are seen and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil. (from That Which Is Seen, and That Which Is Not Seen, by Frederic Bastiat, published in 1850)

. . . the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. (from chapter one of Economics in One Lesson, by Henry Hazlitt, published in 1946)

This basic lesson has never been more obviously ignored than in President Elect Obama's plan to begin a massive new public works program. According to a New York times article :

President-elect Barack Obama committed Saturday to the largest public works construction program since the creation of the interstate highway system a half-century ago as he seeks to put together a plan to resuscitate the reeling economy.

Applying Bastiat's lesson, as supplemented by Hazlitt,

Alan D. Viard, an economist at the American Enterprise Institute, told Congress recently that public works spending should not be authorized out of “the illusory hope of job gains or economic stabilization.”

“If more money is spent on infrastructure, more workers will be employed in that sector,” Mr. Viard told the House Ways and Means Committee. “In the long run, however, an increase in infrastructure spending requires a reduction in public or private spending for other goods and services. As a result, fewer workers are employed in other sectors of the economy.”

Is this lesson too difficult for liberals to understand? Are they really that short sighted? Or are they simply too weak to stand short term pain for long term health?

Or, as seems most likely, is it simply a matter of power lust? They want to stay in power, and giving away money to those who vote for them is the best way of retaining their support. Call it cynical, but this observation seems to describe the Democrats - and, increasingly, the Republicans - very well:

"A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.

The average age of the world's greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence:

· From bondage to spiritual faith;

· From spiritual faith to great courage;

· From courage to liberty;

· From liberty to abundance;

· From abundance to complacency;

· From complacency to apathy;

· From apathy to dependence;

· From dependence back into bondage."

- Lord Woodhouselee (Alexander Fraser Tytler) 1747-1813

Scottish-born, British lawyer and writer

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