The Seen and the Unseen. Part I. On the Economics of Protecting Employment

The misfortune of Bastiat was that he never spouted endless pages of obscure prose. He wrote with such impeccable, jargon-free clarity that his readers thought he was simply stating the obvious that they knew anyway. He was, and still is, widely taken for a mere vulgarizer, clever with his pen but not a great thinker. In his own country, where obscure and high-flown writing is often prized above simplicity, Bastiat is as good as unknown. Yet it is there that heeding his words would do the most good.

In one of his most path-breaking essays on “What Is Seen and What Is Not Seen”1 Bastiat writes:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effects; the good economist takes into account both the effect that can be seen and the effects that must be foreseen.

Yet the difference is tremendous, for it almost always happens that when the immediate consequence is favourable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist will pursue a small present good that will be followed by a great evil to come… (p.1.)

What is politely called “employment policy” or the “fight against unemployment” in much of Continental Europe today is a classic example of how the visible good conjures up an invisible evil. Job protection, in particular, stands out.

Today, in Germany and France, divorcing your spouse is easier, and in most cases cheaper, than dismissing an employee under due observance of the provisions of the contract of employment. The administrative hurdles can be a long nightmare. Court approval may be required and failing it, the employees in question must be reinstated. The labor union representing a majority of the employees must agree to the “social plan” by which the employer company undertakes to assist the employees who lose their jobs. Nestle, losing vast sums of money year after year at its French mineral water firm Perrier and made to jump through hoops by the radical labor union CGT which kept rejecting one “social plan” after another, could tell a tale about this. So could many others who often spend the best part of their management time on trying to obtain permits for job cuts.

Lately, a French draft bill, redefining the conditions under which job cuts could be permitted, included the “safeguarding of competitiveness” as one of the grounds for authorising such cuts. The CGT cracked the whip, President Chirac heard the crack, Mr. Raffarin the premier heard that Mr. Chirac has heard it, and the provision about competitiveness was tactfully scrapped.

It is too obvious for words that when firing is very difficult, very expensive and takes long to accomplish even if it is eventually allowed, hiring will look a much more dubious proposition than it would otherwise do. The potential employer will think twice before creating a new job or filling one that falls vacant by natural wastage. Having thought twice, his third thought is quite likely to be not to hire.

Perhaps there is something to be said for making companies think twice about hiring, for while costless and riskless hiring and firing may make for an ideally efficient labor market, it does not make for loyalty and stability, nor for the employees’ peace of mind. But their peace of mind suffers more when faced with long-term unemployment.

With the exits from a hall blocked by formidable legal devices and extraordinary privileges granted to labor unions, it is surely fatuous to stand at the entry, wave a program called Employment Policy at the potential employers dithering outside and tell them to “come in, come in all the same”. How many would come in, knowing that they could not get out as and when they wished?

It may be, though it is hardly certain, that “blocking the exits” does preserve some jobs. Volkswagen has recently accepted to block its own exit by agreeing to maintain present employment levels till 2011 in exchange for a wage freeze to 2007—an astonishingly audacious undertaking. Perhaps it will work out. Be that as it may, the jobs that are saved by one means or another are “what can be seen”. The jobs that fail to get created, or fail to get replaced, because of the very justified fear the blocked exit raises in the employer, are “what cannot be seen”. As Bastiat would have it, the small but visible present good must be followed by a greater but invisible future evil. Surely, however, not everybody is a complete idiot? Surely, many or most people must see that this is so? In fact, many do see it, but this does not necessarily prevent the few but visible jobs to be preferred to the many invisible ones that may be lost as a result.

The peoples of East and South Africa suffer heavily from AIDS, but are reluctant to talk about it. They prefer to regard it as a malevolent act of Nature, rather than to admit that its spread had something to do with their own free and easy practices. The “political classes”, if not the peoples, of Continental Europe display much the same attitude in the face of endemic unemployment. It is a malevolent circumstance beyond their control. The social regime they have put in place is not responsible for its spread. In no way is it the consequence of the “European Model”, which is blameless in the matter. They will readily praise the European Model for its purported humane dispositions, including its concern for protecting employment, but will not admit that the spread of unemployment owed anything to these concerns. Much of this is just fake innocence and whistling in the dark, for it is impossible honestly to believe that chronic unemployment is in no way the “model’s” fault.

Behind the fake innocence, a powerful political mechanism is at work, forcing attention to be confined to “what can be seen”—a mechanism that Bastiat in the 1840s did not account for, because in his time it did not yet exist. It developed after World War II along with the rise of the Welfare State and its systematic study was left to the “public choice” branch of economics to undertake from the 1970s onwards. Job protection is an instructive case study.

“Blocking the exit” in a country of the size of Germany or France may well abort each year 200,000 or more jobs that would have been created. A company trying to cut 200 jobs at its plant in a smallish provincial town will set off 200 furious and desperate screams insisting on protection. The despair and fury are perfectly understandable. They could hardly be mitigated by telling the protesters that overall job protection will cost the country as a whole 200,000 jobs. The local screams will be transmitted to the capital, and multiplied in volume, by the labor unions and the news media, frightening the wits out of a government worried about its score in the polls and the next election. It takes more self-confidence and “long-termism” than most governments possess, to rise above such worries.

Once the state has moved into the economic sphere and taken responsibility for propping up the wellbeing of its citizens with the money it takes from them, it can hardly stop them running to it for help when their wellbeing needs propping up. The process, of course, becomes cumulative, for “what is not seen” must systematically be sacrificed for the sake of “what is seen”. Bastiat’s great discovery, opportunity cost, that evaluates a chosen alternative against the forgone alternative that could have been chosen in its place, must then lose its edge.