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1. Classical Economics, Lecture 6
Bastiat and the Laissez-Faire School

2. Two Themes
• This chapter has a discussion of a lot of
people, but two central themes tie the
chapter together.
• Rothbard contrasts English economics
unfavorably with French economics. French
economics was subjectivist and consistently
laissez-faire. English economics was
compromising and muddled.

3. Two Themes Continued
• English economics remained under the influence
of Mill. Even after the subjectivist revolution of
the 1870s, English economics retained some cost-
of-production elements from Mill.
• Mill often supported free market measures, but in
a compromising way. He made room for labor
union activity to increase wages. He was also
sympathetic to a form of socialism as an ideal.

4. Criticism of Hayek
• Rothbard is here implicitly challenging a
famous essay by Hayek, “Individualism:
True and False”.
• Hayek contrasted French liberalism, which
was dogmatic and Cartesian, with English
liberalism, based on compromise and
tradition. Rothbard thinks that the French
way of doing things was better.

5. The Second Theme
• The end of the 19th
and the beginning and
middle of the 20th
centuries were marked by
increasing statism.
• The period 1850-1870 was different. There
was an international movement in favor of
classical liberalism.

6. Bastiat
• Frédéric Bastiat (1801-1850) was the most famous
French laissez-faire economist, but he wasn’t
alone.
• Rothbard discusses many other people who were
allied with him, such as Charles Comte and
Charles Dunoyer. These French writers were in
the tradition of J.B. Say rather than Adam Smith.
Note that Rothbard never confines himself to
discussing just a few central people.

7. The Broken Window Fallacy
• One of Bastiat’s most famous essays discusses the
broken window fallacy. Rothbard treats this essay
as a refutation of a proto-Keynesian view of
economics.
• In story, a boy hurls a brick through a store
window. The common sense reaction is that the
boy’s activity is destructive. There has been a net
loss of wealth in society, i.e., the broken window.

8. Broken Window Continued
• A second-level of thought now comes in.
Someone claims that the boy’s activity
wasn’t destructive. Because the window is
broken, the store owner has to buy a new
window. His spending will help the glazier.
In turn, the glazier will spend the money on
other things and this will spread prosperity
and employment through the economy.

9. More Broken Window
• What’s wrong with this? It’s true that the store
owner spends money to repair the broken window,
and this generates income and employment.
• But if the window hadn’t been broken the store
owner would have spent the money on something
else or saved it. The broken window produces no
net gain and there is a loss---the broken window
itself.

10. The Broken Window and Keynes
• You might think that the broken window fallacy is
so obvious that no one would really commit it.
• It is in fact the basis of at least one version of
Keynesian economics. E.g., Paul Krugman says
that to get the economy going, the government has
to spend more. Krugman actually said that the
destruction of the World Trade Center in 2001
would have economic benefits But—leaving
increases in the money supply aside—wouldn’t
this be diverting spending from other things?
• .

11. The Keynesian Answer
• The Keynesians respond that sometimes,
the broken window reasoning works. In a
time of depression and unemployment, the
alternative to government spending may not
be spending on something else. People
might not have spent their money on
anything. It could be hoarded, as people
wait for prices to fall further. There can be a
downward spiral.

12. Answer Continued
• The dispute between the Keynesians and their
opponents is one that we have studied before.
• This is same as the argument over Say’s law.
Defenders of Say’s law say that saving money
does not alter the fact that there can’t be a general
over-production. If money is hoarded, it will rise
in value and eventually, it will be spent.
• This is called the real-balance or Pigou effect.

13. Bastiat as a Theorist
• Some people dismiss Bastiat as just a
pamphleteer. Marx was very derogatory
about Bastiat.
• Rothbard and Hayek rate him highly.
• In contrast to Adam Smith’s emphasis on
production, Bastiat stressed exchange. Each
person who engages in exchange expects to
benefit.

14. Goods and Services
• Bastiat rejected the distinction between productive
labor on material goods and unproductive labor on
services. This also comes from Adam Smith.
• For Bastiat, all goods are services. What people
want is not the physical good itself, but the
satisfaction the good provides.
• Bastiat’s formula was “Wants-Effort-
Satisfaction”. He stressed consumption as the goal
of economic activity

15. Bastiat and Free Trade
• Bastiat was the greatest popular defender of
free trade. His “Petition of the Candle
makers” made fun of the efforts of
protectionists to restrict production in order
to advance their own interests.
• Here the candlemakers protested against the
unfair competition they got from the sun.

16. Free Trade Continued
• Bastiat was more than just a writer about free
trade.
• He was an active influence in French politics and
a member of the French Constituent Assembly and
Legislative Assembly after the Revolution of
1848. He was a good friend of Richard Cobden,
who later, in 1860, negotiated a trade treaty with
France.
• Bastiat influenced people all over Europe. In
Prussia, John Prince Smith led a classical liberal
and free trade movement.

17. The Law
• Bastiat’s pamphlet The Law (1850) is an important
contribution to libertarian political theory.
• Bastiat says that the state can’t acquire new rights
that individuals don’t have. Persons can delegate
to the state, e.g., their right to protect themselves;
but the state can’t do anything that individuals
couldn’t do in a state of nature.

18. The Law Continued
• Bastiat also criticizes socialists and planners
for wanting to control society. They want to
impose their values on others. This is a
precursor to Road to Serfdom.

19. Molinari
• The Belgian Gustave de Molinari (1819-
1912) lived most of his life in France and
was associated with the French classical
liberals.
• He said, if free competition is good, why
not competition among protection agencies?
He defended anarcho-capitalism.

20. Dunoyer’s Response
• The French classical liberals thought Molinari’s
proposal was too radical but they didn’t discuss it
very much.
• Charles Dunoyer did discuss it. He objected that
competing agencies would get into violent fights.
• Don’t nations already do this? Also, agencies
would have an incentive to agree.
• Despite their disagreements, the French classical
liberals respected Molinari.

21. Pareto
• Vilfredo Pareto (1848-1923) was strongly
influenced by Molinari.
• He adopted the French libertarian class theory.
Protectionism and other restrictionist measures
were ways some groups, with the help of the state,
could act as predators on others.
• He viewed the state as predatory, like
Oppenheimer and Nock later.

22. Pareto Continued
• After the move toward statism in the 1870s,
Pareto became cynical. He became less of a
political advocate and more of a detached
scientific observer.
• He analyzed the motives of various social
movements.
• He ended as a supporter of Mussolini.