Economic Harmonies

Frédéric Bastiat, 1801-1850, is generally classified as an economist. But, as I showed in my book on his life, works, and influence, his real claim to fame properly belongs in the field of government—both in its organization and in its philosophy.
*1 Even so, his contribution to the field of economics was considerable, especially in the area of free trade.

Bastiat was a contemporary of Richard Cobden, the man most responsible for bringing free trade to Great Britain in 1846. The two men became close friends when Bastiat attempted to do in France what Cobden had accomplished in England. While Bastiat was unsuccessful in bringing free trade to France during his lifetime, his disciple, Michel Chevalier, was the co-author with Cobden of the Anglo-French Treaty of Commerce that finally accomplished the objective in 1860.

Bastiat’s interest in free trade, however, was still incidental to his passion for freedom in general. As he wrote in one of his numerous letters to Cobden, “Rather than the fact of free trade alone, I desire for my country the general philosophy of free trade. While free trade itself will bring more wealth to us, the acceptance of the general philosophy that underlies free trade will inspire all needed reforms.”

Bastiat spelled out that philosophy in considerable detail in his major work,
Principles of Political Economy. In the Introduction to that book, he made the statement, “It would be nonsense for me to say that socialists have never advanced a truth, and that economists [those who advocate a free market] have never supported an error.”
*2 As we shall see, one of Bastiat’s major ideas in his
Harmonies—his theory and definition of
value, of which he was especially proud—is now generally held to be somewhat pointless. That fact, of course, does not deny the soundness of his fundamental principle that the interests of mankind are essentially harmonious and can best be realized in a free society where government confines its actions merely to suppressing the robbers, murderers, falsifiers, and others who wish to live at the expense of their fellow men.

The first economic harmony that Bastiat illustrated was the idea that, as the capital employed in a nation increases, the share of the resulting production going to the workers tends to increase both in percentage and in total amount. The share going to the owners of the capital tends to increase in total amount but to decrease percentagewise. Bastiat used hypothetical figures merely to
indicate the direction of this relationship that occurs when capital accumulation increases, with its resulting increase in production.

That theory was offered to refute the gloomy “iron law of wages” advanced by Ricardo, as well as Malthus’ equally horrible prediction that an increasing population must necessarily face starvation. Bastiat recognized the fact that, in this division of national income, the amounts and percentages going to capital and labor would, for a variety of reasons, vary widely from industry to industry, from country to country, and from time to time. But he was quite positive that the tendency would be in the direction indicated by his figures for the nation that encourages the private accumulation of capital.

This trend that Bastiat predicted in the division of the total production of the nation is just what did happen under increased capital formation in the United States and other countries that more or less follow the concepts of a market economy.

Bastiat arrived at his theory by observing that new tools and new methods are more productive than older tools and former methods, and that competition tends to cause most of the resulting benefits to be passed along in higher wages or lower prices, or both. In either instance, real wages are thereby increased. Like many of his predecessors, Bastiat also noted that interest on capital is likely to decline as capital becomes more plentiful. (History does not record the first person who discovered this primary law of supply and demand.) At any rate, the verdict of the Twentieth Century to date refutes the gloomy predictions of Ricardo, who argued that wages always tend toward the lowest level needed to sustain the required working force at a minimum standard of health. Bastiat’s optimistic theory that real wages tend to rise constantly in a free market is more in accord with reality.

Thus, according to Bastiat, the interests of capital and labor are harmonious, not antagonistic. Each is dependent on the other. Both gain by working harmoniously together to increase both capital and production, even though the employees tend to get the lion’s share of the increased production. Government interference
in the long run will injure the interests of both owners and workers, but most especially the workers.

In his major work, Bastiat discussed the “harmony of capital” in almost every chapter, and from various viewpoints. His treatment of the subject is, by far, the most convincing part of his book. While it is doubtless correct to observe that Bastiat contributed nothing new to the actual
theory of capital, it is perhaps equally correct to suggest that his presentation and development of several facets of the subject are superior to those of his predecessors and teachers—Smith, Say, and others.

We have already noted one of his “harmonies of capital” above. Here is another. If the market is free, said Bastiat, no one can accumulate capital (excluding gifts) unless he renders a service to someone else. The people who have the capital (including the person who has only one dollar) won’t part with it unless they are offered a product or service that they value as highly as the capital. In reality, said Bastiat, capital is always put at the service of other people who do not own it, and it is always used to satisfy a desire (good or bad) that other people want satisfied. In that important sense, all capital is truly owned in common by the entire community—and the greater the accumulation of capital, the more its benefits are shared in common.

“Here is a worker whose daily wages is four francs. With two of them, he can purchase a pair of stockings. If he alone had to manufacture those stockings completely—from the growing of the cotton to the transporting of it to the factory and to the spinning of the threads into material of the proper quality and shape—I suspect that he would never accomplish the task in a lifetime.” Bastiat offered several other similar stories and parables based on that same idea of the benefits that come to all from the increasing division of labor that automatically follows the accumulation of capital.

Contrary to most of his classical predecessors, Bastiat was almost totally concerned with the interests of the consumer. While he wished to render justice to the producer (the capitalist and the entrepreneur), he seemed concerned with him only in passing. Perhaps that can be explained by the fact that the socialists of Bastiat’s day were in the ascendancy—and Bastiat desired to beat them at their own game by showing that the workers and consumers (rather than the owners of capital) are the chief beneficiaries of private ownership, competition, free trade, interest, profits, rent, capital accumulation, and so on.

The harmony that Bastiat found in all this was the same as that demonstrated by Adam Smith and the physiocrats: In serving his own selfish interests, the producer has no choice but to serve first the interests of the consumer, if the market is free. Each person may be working only to benefit himself but, doubtless unknown to himself, he is really working primarily to satisfy the needs and desires of others.

By both observation and reason, Bastiat was led to the conclusion that man tends to satisfy his wants with the least possible effort. That would seem self-evident, but Bastiat used that simple axiom to show that a popular way to satisfy one’s wants with minimum effort is to vote for subsidies and protection. Bastiat pointed out the awkward fact that such a solution is contrary to the wants and actions of the persons who must pay the resulting higher taxes and higher prices. This government path to satisfying one’s wants is antagonistic, rather than harmonious, and is thus self-defeating in the long run. It will result in less than maximum production by both those who must pay the subsidy and those who receive it. When the government interferes, said Bastiat, the natural harmony of the free and productive market is destroyed, and the people waste their energies in attempting to win political power in order to exploit each other. “Everybody wishes to live at the expense of the state, but they forget that the state lives at the expense of everybody.” In another book, Bastiat also stated that idea in this way: “The state is the great fiction by which everybody tries to live at the expense of everybody else.”

In his
Harmonies, Bastiat felt that he had made a major contribution to political economy by his definition of
value. He felt that his concept should reconcile the conflicting opinions of all economists—including even the socialists and communists! He introduced the subject by making a sharp distinction between
utility and value. Under utility, he listed the sun, water, and undeveloped land. According to him, none of the gifts of Nature have any
value—until human effort has been applied to them. While he specifically rejected the labor theory of value, he may well have endorsed it unknowingly under another name—service.

According to Bastiat, service is the source of all value, and any exchange implies equal value. Water has no value in its native state. But the building of a well and the hauling of the water to the consumers (services) have value. And the purchaser pays for it with equal services, even though it may be in the intermediate form of money that facilitates the transferring of past, present, and future services.

Bastiat felt compelled to defend the rightness and justice of every voluntary exchange. Thus, he was most happy with his idea that the
service supplied by the man who accidentally discovers a valuable diamond is worth a large price (other services) because it saves the purchaser from the effort that is usually connected with the securing of such a gem.

Bastiat just ignored the fact that the value to the purchaser would be the same, whether the seller had found the diamond, inherited it, or worked for several years digging it out of the ground. Thus, the value of an article is clearly not directly related to the “service” supplied by the seller himself, and Bastiat’s effort to reconcile that fact with his general theory led him completely astray in this area.

In his chapters on “Exchange” and “Value,” Bastiat quoted two men who clearly (and perhaps first) saw the true relationship between exchange and value—and he then scoffed at both of them. The first was Étienne Bonnot de Condillac, 1714-1780: “From the very fact that an exchange is made, it follows that there must be a profit for each of the contracting parties; otherwise the exchange would not take place. Thus, each exchange represents two gains for humanity.”

The second quotation cited by Bastiat was by Heinrich Friedrich von Storch, 1766-1835: “Our judgment enables us to discover the relation that exists between our wants and the utility of things. The determination that our judgment forms upon the utility of things also determines their value.”

These two statements combined are perhaps the basic concepts of exchange and value later developed so brilliantly by the Austrian school of economists. That is, the value of a product or service is purely subjective on the part of the purchaser; neither seller nor buyer will make the exchange unless each values what he receives more than what he gives up; there is no automatic relationship between value and the labor or capital that goes into the product or service; no one can determine the value of any product or service for another person.

Thus, Bastiat had full opportunity to make a vital contribution to economic thought by developing these two ideas, with which he was obviously familiar. Most unfortunately, he missed the opportunity.

Even so, perhaps Bastiat supplies the connecting link between the English classicists, with their objective theory of value, and the Austrians, with their subjective theory based on the universal actions of men in real life. At least, the following series of quotations extracted from various pages of his
Harmonies indicates clearly that he had advanced far beyond the former and was making excellent progress toward the latter.

“The subject of political economy is MAN…. [who is] endowed with the ability to compare, judge, choose, and act; which implies that men may form right and wrong judgments, and make good and bad choices….. This faculty, given to men and to men alone, to work for each other, to transmit their efforts, and to exchange their services through time and space, with all the infinite and varied combinations thereby involved, is precisely what constitutes economic science, identifies its origin, and determines its limits….. The objects of political economy [the actions of men in the exchange of their goods and services] cannot be weighed or measured….. Exchange is necessary in order to determine value….. Owing to ignorance, what one man values may be despised by another….. A man’s happiness and well-being are not measured by his efforts, but by his satisfactions, and this also holds true for society at large….. It may happen, and frequently does, that the service we esteem highly is in reality harmful to us; value depends on the judgment we form of it….. In an exchange society, man seeks to realize value irrespective of utility. The commodity he produces is not intended to satisfy his own wants, and he has little interest in how useful it may be. It is for the purchaser to judge that. What concerns the producer is that it should have maximum value in the market….. It is in vain that we attempt to separate choice and responsibility.”

In addition to the ideas expressed above, Bastiat also developed in great detail the theory that competition will cause all of the gifts of Nature to become widespread—including, of course, land and all other natural resources.

Like almost all economists of his time, Bastiat was obsessed with this problem of rent on land. If it could not be justified and harmonized, he said, then the question asked by the socialist Proudhon was correct: “Who is entitled to the rent on land? Why, of course, the one who made the land. Then who made it? God. In that case, would-be owner, get off.”

Bastiat’s defense of rent covers many pages, but it adds up to this: Land rent is justified because the owners of the land (current and past) have rendered a valuable service. They have cleared the land, drained it, and made it suitable for planting. They have paid taxes to have roads built to it. If the amount of labor and capital that has been expended on the agricultural lands of France were capitalized, Bastiat contended, the current return in the form of rent would be considered a most unattractive investment today. Therefore, the owners of land do not enjoy an unearned income—or, at least, they would not if the market were free. Bastiat argued that any “unearned” rent was, like protected prices for manufactured products, the result of government interference with domestic and foreign trade. On the subject of rent, Bastiat was a physiocrat, pure and simple. He also used this same idea to defend the necessity and justice of a return on capital in general; all current capital, he said, merely represents past labor that has been saved and is rendering a service today.

While Bastiat’s arguments on land rent are most persuasive—and were doubtless true in the context presented—they were too carefully selected to prove any over-all principle. For it is undeniably true that land (like other products and services) can and does vary widely in price for a variety of reasons, and that the owner of the land can reap a profit (or suffer a loss) even though he has done no work at all on it. But, once again, it does not follow that Bastiat was wrong in imagining that harmony can be found in the private ownership of land and the charging of a
free-market rent for its use.

Bastiat was particularly anxious to refute the gloomy theories of Ricardo and Malthus in regard to wages, rent, population, and starvation. He felt that his theory that labor receives an
increasing share from additional capital accumulation was an answer to Ricardo on wages and to Malthus on starvation. He answered Ricardo directly on the subject of land and rent. Finally, he offered the
opinion that if man were free—truly free—with God’s help he would discover harmonious ways to keep the population from increasing beyond the ability of science to discover new ways to feed it.

Bastiat has no great standing among leading economists as an innovator or an original thinker in the field of economic theory. That verdict may be justified. But his development of his central idea of a universal harmony in all areas of human relationships led Gide and Rist to write, “The fundamental doctrines of [the liberal or optimistic school] were definitely formulated about the same time, though in very different fashion of course, in the
Principles of Stuart Mill in England and the
Harmonies of Bastiat in France.”