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The Seen and the Unseen. Part II. The Costly Mistake of Ignoring Opportunity Cost : Anthony de Jasay
7 paragraphs found.
 

This happy coincidence abruptly ceases to hold in a non-market environment, where the cost may be raised from the taxpayer, where the expected benefit is most often un-priced, non-traded and intangible, and where resources move from one use to another not in response to profitability, but to legislative and regulatory commands. It is in this environment of public policies that Bastiat's pioneer teachings about opportunity cost1 become strikingly timely again, just as they were during the 1848-49 socialist episode when he wrote them down.

 

Public expenditure is seldom totally useless; its usefulness, however modest, is "what is seen" and this is one reason why even such expenditure can be so popular. The public tends implicitly to believe that "what is not seen" does not even exist—that when a new opera house or stadium is built, it is all a net gain of national wealth, for nothing else would have been built in their place. In the limiting case, even useless outlay can be "useful" if it provides employment. Bastiat has a tale about the broken window that gives the glazier a job of work: "what would become of the glaziers if nobody ever broke a window?" He also relates that when Napoleon had ditches dug and filled in again, he was convinced of doing good, by causing "wealth spread among the labouring classes." ["What Is Seen And What Is Not Seen", par. 1.6 and par. 1.88.]

 

The belief that even useless activity is good if it provides work and income for the glazier and the ditch-digger, instead of leaving them idle, and thus by a ripple effect stimulates demand and employment throughout the economy, has been lent intellectual respectability by the good old Keynesian doctrine that the cause of unemployment is lack of effective demand. After the experience of recent decades, this belief is no longer widely held. Bastiat, of course, never held any such belief. Indeed, he seems to have been quite unaware of the possibility that if resources are idle, their opportunity cost may in fact be zero. However, the bitter and stubborn failure of make-work schemes in Western social democracies to lure idle resources out of unemployment into work shows that in practice zero opportunity cost, like Milton Friedman's free lunch, just cannot be had.

 

Perhaps the most important area where public policy tends to overlook opportunity cost is in the defence of "what is seen". Bastiat takes issue with the poet and revolutionary deputy Lamartine over subsidies to the arts and the theatre. Maintaining these activities by state aid serves a worthy aim, including employment for artists, actors and artisans, but Lamartine sees only what is thus preserved. He does not see the opportunity cost, namely that the resources devoted to the arts would have served other aims that corresponded to what people actually chose rather than to what the state induced them to choose by subsidizing a particular branch of activity. Bastiat does not deal with the idea of "merit goods" that ought to be produced whether the public wants them or not. But he stresses that promoting the fine arts can only be done at the cost of cutting back other things—a loss we do not see. It is, he notes, impossible to promote everything at the expense of everything else. This echoes his famous definition of the state, "the great fictitious entity by which everyone seeks to live at the expense of everyone else" (op. cit., p.144 [online, pars. 1.69-1.73.]).

 

In the same tongue-in cheek manner that he adopts when speaking of the broken window, the candlemakers who must be protected from the unfair competition of the sun, and the "negative railway" that, by not being laid, will keep all the carters and their horses in business, Bastiat finds that only "stupid nations" can enjoy wealth and happiness, for only they are incapable of inventing the machines that destroy prosperity.

 

"Good Lord," Bastiat sighs, "what a lot of trouble to prove in political economy that two and two make four; and if you succeed in doing so, people cry: 'It is so clear that it is boring'. Then they vote as if you had never proved anything at all".

 

The concept of opportunity cost was first formally defined by one of the founding fathers of the Austrian school of economics, Friedrich von Wieser, in 1876. A generation earlier Bastiat made it clear to the ordinary reader in his brilliant essay "What Is Seen And What Is Not Seen" (Frederic Bastiat, Selected Essays on Political Economy, ed. By George B. de Huszar, 1964/1995, Irvington-on-Hudson). [For more on Wieser, see these selections and bibliographical items from James M. Buchanan, Frank H. Knight, and John N. Gray."—Econlib Ed.]