paradox of thrift

Addendum to “A Short Course in Economics”

The first 19 points appear in “A Short Course in Economics.”

20. The interest-group paradox is a variant of the paradox of thrift. Many Americans (perhaps most of them) favor certain government programs because (they believe) those programs will benefit the class of persons to which they belong, or a class of persons for which they have sympathy. Each such program then becomes a “free lunch,” and you know that there’s no such thing as a free lunch — someone must pay for it, somehow. In the case of government programs, most of us wind up paying for a lot of free lunches because there are thousands of government programs (federal, State, and local), each intended to help a particular class of citizens at the expense of others. And there goes your free lunch.

Wait, it’s worse than that. Picture a row of beer-drinkers at a bar. Each of them is determined to get a bigger free lunch, so each of them eats more. Result? A rise in the price of the beer. Some free lunch.

Even the relatively few persons who might seem to have obtained a free lunch — homeless persons taking advantage of a government-provided shelter — often are victims of the free lunch syndrome. Some homeless persons may be homeless because they have lost their jobs and can’t afford to own or rent housing. But they may have lost their jobs because of pro-union laws, minimum-wage laws, or progressive tax rates (which caused “the rich” to create fewer jobs through business start-ups and expansions).

21. The interest-group paradox is closely related to the fallacy described by Frédéric Bastiat in his essay “What Is Seen and What Is Not Seen“:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

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

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa….

The pursuer of the free lunch grasps the free lunch but fails to grasp the unintended and costly consequences of his pursuit.

22. Perhaps the gravest of economic fallacies is the belief that regulated economic activity produces better results than unregulated economic activity. This fallacy stems from the fallacy pointed out by Bastiat. Most of us take comfort in plans of one kind or another because we can “see” what the plan intends. What we fail to grasp is that plans — all plans — have unforeseen, unintended, and undesirable consequences. It is those consequences — what is not seen — that undo economic plans and turn hoped-for benefits into actual costs.

By the same token, most of us fail to grasp the fact that unregulated economic activity yields positive results because it involves willing actors engaged in mutually beneficial exchanges of goods and services. Adam Smith was never more correct when he wrote that every individual

[b]y pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

That which is produced and consumed voluntarily benefits both its producers and consumers. That which is produced through government fiat may benefit those who dictate its production, while harming consumers by (a) failing to produce that meets their needs and/or (b) producing something that partially meets their needs, but at a higher cost than necessary.

23. Moreover, to quote Wilhelm von Humbolt:

“If men were left to their own deeds and devices, deprived of all outside help that did not manage to obtain themselves, they would also frequently run into difficulty and misfortune whether through their own fault or not. But the happiness for which a man is destined is none other than that which he achieves by his own energies. And it is these very situations which sharpen a man’s mind and develop his character.” (The Limits of State Action [1792]).

A sense of self-worth is important to us; it has economic value of its own. Economics isn’t (or shouldn’t be) the “science” of wealth or output maximization; it is (or ought to be) the “science” of happiness-seeking.