All Commentary
Friday, February 1, 1985

An Ancient Chinese Story

Dr. Russell, recently retired from a full schedule of academic work, continues free-lance consulting, lecturing and writing from his home in Westchester County, New York.

This is one of a series of articles examining current interventions of the welfare state in the light of warnings from the French economist and statesman, Frederic Bastiat (1801-1850).

In this particular satire or parable, Bastiat illustrates the ever-present and always-popular concept that government can create jobs and prosperity by means of useless (even destructive) make-work schemes, e. g., digging post holes and then filling them in, as was frequently done by our government in the 1930s to get the economy going again. This story is based on the same idea.

There were in ancient China two large cities, Tchin and Tchan. They were connected by a magnificent canal that had been built to encourage more trade at less transportation cost between the cities. But during a depression in that section of China, the Emperor decided to create jobs and prosperity by ordering large blocks of stone thrown into the canal, thus making it useless.

The Emperor’s Prime Mandarin, when ordered to carry out this plan, said to him, “Son of Heaven, this is a mistake!”

The Emperor replied, “Kouang, you talk nonsense!” (“I am here giving you only the substance of their conversation,” said Bastiat.) At any rate, the quarrying, transporting, and throwing of those blocks of stone into the canal did clearly provide jobs for many Chinese. And that isn’t all.

At the end of three months, the Emperor summoned his Prime Mandarin and said, “Kouang, look across the old canal.”

Kouang looked and saw a multitude of men at work. On the other side of the old canal, workers were busily excavating, filling, leveling, and paving. They were building a new highway between the two cities to facilitate trade!

When another three months had elapsed, the Emperor again sent for his Prime Mandarin and said, “Kouang, look.”

And Kouang looked. He saw the road completed. Crowds of carts were carrying goods from one city to the other. And a multitude of Chinese porters were carrying on their tired backs enormous burdens from Tchin to Tchan, and from Tchan to Tchin. He also noticed that builders were busily constructing inns for travelers along the new highway. Kouang was beginning to be convinced that his Emperor’s scheme to create prosperity by filling in the canal was a brilliant and practical idea. But there is still more.

Another three months passed, and the Emperor sent again for Kouang and said, “Look.”

Kouang looked. In addition to all the activity he had seen before, there was now a great deal more. The hostelries were now completed and full of travelers. And to supply their needs, there were butcher shops, bakers’ stalls, shops for the sale of edible birds’ nests, and so on. There were also tailors, shoemakers, sellers of parasols and fans, and many more. And as those service- people also needed houses, there was a plentiful supply of masons, carpenters, and roofers. Then, of course, there were policemen, judges, and other necessary officials. There was even an increase in the number of persons who employed themselves as smugglers and robbers.

Finally Kouang was fully convinced that his Emperor was indeed the most brilliant genius who had ever lived. The Son of Heaven had proved conclusively that prosperity . . . [and] jobs can be created by obstructing trade.

As usual, Bastiat followed his satire by applying the principle to some current law or governmental scheme designed to create prosperity by obstructing the free market economy. In this particular case, he featured the concepts that, as a result of the make-work scheme, “The people as a whole in Tchin and Tchan were now working harder and producing less; that prices had gone up and real wages had gone down because of the increased transportation and labor costs of moving goods between the two cities.”

Less Production, Higher Wages, and Lower Prices

These governmental interventions in the market place (including make-work and other legal- plunder schemes) are producing precisely the same results in the United States today. If I’m right, that idea certainly deserves a closer look. So let’s briefly develop the results predicted by Bastiat, i. e., less production, higher prices, and lower wages—all caused by substituting a more expensive factor of production (labor) for a less expensive one (“machinery”). Since all those ideas are inextricably mixed, I’ll just include them as they come up.

My students at the University of Wisconsin were usually baffled when I argued that we American people are indeed working hard but, as the government increasingly moves into the economy, we’re producing less and less. They found that concept hard to grasp; it seemed contrary to what they could actually see around them.

As near as I can figure, the reason was this: The students were looking at the Gross National Product, i. e., the amount of products and services produced and sold, whatever the type or quality or cost. That’s not too surprising since, in their courses in ma-cro-economics, that’s precisely how they were taught to look at it. And true enough, by that measurement, the yearly increase in goods and services is usually impressive; and, of course, we can buy only what’s available to be bought.

By that GNP measurement, however, our government can (literally) increase national production and national income by paying people to destroy what they’ve already produced, e. g., plow the crops under, or kill the little pigs, or build a new and expensive canal alongside an existing and under-used and lower-cost railroad (one part of our famous TVA project). Thousands of projects of that nature most definitely did create jobs and increase the GNP during the 1930s, and we’re still following that same policy today.

To my way of thinking, the net result of those uneconomic projects (and most other similar governmental schemes) to increase work and jobs is a constantly decreasing rate of growth of goods and services we can use for the improvement of our material welfare. Unfortunately, we have no reliable figure for the amount of wanted goods not produced because our money is spent by government on something our congressmen quite openly refer to as “pork barrel” projects, i. e., uneconomic projects designed primarily to create jobs in their congressional districts. Sometimes they even joke about it.

The Auto Industry

Restrictions against trade are, of course, imposed by government for this same purpose of creating jobs. The automobile industry offers an excellent example.

We’re all familiar with quotas and tariffs against foreign cars. And as advertised, that policy most definitely does create more jobs in the automobile industry in the United States, as well as more “tariff jobs” in government. Surely all of us are also familiar with the fact that the constantly-rising prices we must pay for our cars (both foreign and domestic) is due directly to that make-work scheme. But just in case there’s one person somewhere who hasn’t made that connection, I’ll here develop it briefly.

We’ll never know precisely how much more we must pay for our cars because of this governmental scheme to increase jobs and production in the United States. We can’t know it because the only accurate measuring device (i. e., you and I buying cars in a free economy) has been abolished by government in this particular area. Even so, we can look at historical prices and compare the pertinent relationships when there was a free market. And we can compare prices in existing protected and non-protected industries in general. By those measurements, we can estimate with reasonable accuracy that almost all of the $3,500 (average) price increase (since 1981) you paid for your new car was the direct result of our government’s policy to bring prosperity to our country by restricting trade.

We’re talking many billions-of-dollars that you and I and all the rest of us would have spent for goods and services we want but can’t buy because we must pay several thousands of dollars more for our car than would be the case if the market were free. It’s doubtful, of course, that prices on all protected products have increased by more than one-third (the automobile rate) because of these governmental “prosperity schemes.” But surely a figure of 15 percent is realistic. By any economic measurement, however, we’re in the range of hundreds-of-billions-of-dollars of lost production of wanted goods and services that’ll never be produced because our government is protecting us from competition. That’s why I’m convinced that the production of wanted goods and services in the United States is going down, not up.

Backed by Force

Most people obviously disagree (sometimes almost violently) with my reasoning. They’re the ones who have such sublime faith in our government officials. I’m impressed with their sincerity, and a couple of times I’ve been tempted to give some credence to their arguments for in terventions by government. But then I remember where I last saw a large number of them; they were leading the parade to cut our defense budget by at least $100 billion.

At that point, I get the strange feeling they’ve stolen my arguments. They count in great detail all the real (i. e., consumer-productive) jobs that would be created if that $100 billion of “useless spending” were cut from the defense budget. They sometimes even refer to armament production as a vast make-work scheme to make the rich even richer!

I’m not about to get involved in the “defense controversy,” but I’m always astounded when I hear the opponents of that “wasteful military budget” actually using Bastiat’s argument of the “broken window fallacy,” i. e., recounting what can’t be seen because what is seen blocked it out. I do wish, however, they’d suggest the “saved money” be returned to you and me. Instead, however, they just want it transferred to the various “social service departments.” At that point, they re-find their faith in the omniscience of the officials of government—and, of course, they immediately adopt arguments directly opposed to the ones they were just using against the defense budget.

I wonder if they’ll accept this fact: The government officials in any department are no more (or less) efficient or omniscient than the officials in any other department. They’re just you and me—with their decisions backed by the police force. Personally, I’m always distrustful of people who want to have that power over you and me. If that sounds a bit harsh, I’ll happily apologize to the offended officials of government, but I doubt I’ll change the sentiment. I’m convinced that Lord Acton was correct when he spoke of the corrupting influence of power, and said that “absolute power corrupts absolutely.”

When it comes to administering “justice,” I’m aware we must give power to our officials. But let’s keep it restricted, slow, and inefficient, with all sorts of checks and balances. I’m quite willing to pay the high cost of that vital but non-economic service on behalf of “justice.” But when it comes to economic goods and services, I’m after the lowest possible price for the best possible product in the shortest possible period of time. The last mechanism I look to for that performance is our cumbersome form of government with its frequent and disruptive elections that remind me of a particularly vicious proxy-fight to take over a company.

Costly Intervention

I’m aware of the contrary arguments. And I’m especially aware that many people argue quite sincerely that, “Man, I’m an American. I was born here. And I’m entitled to a job that pays a living wage. If that means more governmental intervention in the economy and higher prices for you, so be it.”

While I won’t endorse that popular argument, at least I can understand why poor and sometimes-ignorant people frequently use it, i. e., legal plunder is acceptable if it’s for needy and deserving people. But when our highly educated politicians and industrialists try to hide their own greed and lust for power behind fallacious economic arguments—or behind a plea for plunder “to help others” or even behind patriotism itself—I become unhappy. The automobile industry offers an excellent example of this trend.

Three or so years ago a leading automobile company executive was pleading with Congress for “temporary breathing room” to get his company going again. The “law factory” in Washington produced what he ordered. Today, he’s dropped the “breathing room” simile for the even more poetic one of laws to insure “a level playing field,” i. e., permanent restrictions against competition, so that the less-talented players can compete on equal terms with the better players, a sort of golfer’s handicap arrangement in the production of goods and services. Or to phrase it brutally: To bring the highly-automated and more efficient Japanese automobile industry down to the level of the comparatively labor-intensive and less efficient American automobile industry—at your and my expense.

The result of that first grant of”legal plunder” was (and is) easily predictable. Since Congress awarded it in 1981, the prices for automobiles to you and me have gone up by more than one- third, more than $3,000 per car. And if he and his fellow-executives who’ve joined him are successful in the current campaign to make that “breathing room” permanent, the prices for automobiles in the United States are likely to go up again by another $3,000 or so per car.

Now for a brief look at the primary reason American cars cost more to build and buy than do Japanese cars. You may recall that “the emperor-son of heaven” in Bastiat’s story be-can his job- creating scheme by first hiring men to destroy the canal with its cheap transportation costs. Then he created still more jobs by building a new road from Tchan to Tchin. This, in turn, created a vast number of additional jobs for men to pull loaded carts from one city to the other or (the traditional method of transportation before those canal-barges came along) to carry the goods on their backs. He replaced a cheaper factor of production (a waterway and wind-power) with a more expensive factor of production (human labor). In short, he hit on the ancient (but ever- present and always-popular) idea of creating jobs by destroying machines.

And that’s precisely the reason the cost of American-made cars is at least one-third higher than the cost of Japanese-made cars. The Japanese use as little as possible of the most expensive factor of production (labor) and as much as possible of the cheapest factor of production (capital).

Capital Creates Jobs

As you doubtless know, the result of this low-cost method of production is not fewer jobs. Actually, more jobs are thereby created; they’re better jobs but found in other areas that support the cheap machines and the highly paid people who produce and run them. There’re far more jobs today in highly-mechanized Japan than ever before, and those jobs pay as much as ten times the pre-World War II wage rate. The result of massive capital formation in a free market economy is more jobs, shorter hours, higher pay, and better products at lower prices—in any country that follows the principles of free trade, domestic and foreign.

Try to tell that to the president of the United Automobile Workers union—or to the president of any American automobile company. Save your breath. The answer will invariably be that those sneaky Japanese are just “dumping” their cars in the United States by selling them cheaply—“probably below the cost of producing them.” (There’s that old joke: “If they sell below their costs, how do they make a profit?” The answer: “Mass production; they sell so many of them.”)

There’s just no way that our industrial and labor leaders are going to admit that the Japanese are better managers than we are, or that the Japanese understand the realities of production-costs and market-pricing better than do the American managers, or even that low-cost machine production provides more and better jobs for people in general.

I suspect you’d even put your physical safety at risk if you made those comments in any UAW meeting, especially if you concluded with the flat statement that the reason our cars are more expensive to build than the Japanese cars (and also probably inferior mechanically as well) is that we use too much of the most expensive factor of production (labor) and too little of the less ex pensive factor (machines).

Now for a summary of those specific predictions Bastiat made in his “Ancient Chinese Story,” i. e., less production, higher prices, and lower wages.

1. Well, obviously we’re producing fewer goods and services we ourselves would select if the inefficient and protected and subsidized companies were compelled to meet market demands instead of merely government requirements that permit them to continue to receive the legal plunder.

Our laws are surely protecting millions of jobs that would soon disappear if you and I could decide in the market by voluntarily spending our own money. That automatically includes all jobs in any company that must have tariff protection to continue to exist. Without it, they would all fail or be radically reorganized. I have no count of just how many companies are being kept alive by those non-economic subsidy and tariff laws; it could quite easily run into more than one hundred thousand. We’ll never find out as long as we permit them to hide from reality.

2. In 1980, prices were rising at the yearly rate of as much as 20 per cent. The new administration initiated unpopular measures to bring the yearly rate of increase down to less than five per cent, but it’s still a situation of steadily rising prices—and there seems little doubt but that the increase will accelerate again.

3. While jobs are indeed increasing, there are millions of Americans whose current pay won’t buy as much as their pay did a few years ago, i. e., there has been a decrease in real wages for a large percentage of the American people.

Free to Try

In short, our rejection of a free, open, and competitive economy has cost us dearly, and will cost us even more as time goes on. It’s not that we’re bad people; we most definitely aren’t. In fact, there’s good evidence to support the belief that the primary reason we favor these “make work” measures is a misguided effort to help people who need help. But if we continue to confuse charity and economics, I wonder if we’ll continue to produce enough to go around.

Perhaps the following short story of two young Americans who set out to “make their fortunes” more than three-quarters of a century ago will demonstrate what made America great, and how far we’ve now degenerated.

My Uncle Elliot was an excellent harness and saddle maker. In 1908, he went into business for himself in Burlington, North Carolina—The Russell Harness Shop—with $5,000 capital, a whale of a lot of money at that time and place. By chance, another skilled artisan (a wagon maker) also went into business for himself that same year—Frederick J. Fisher, in Detroit; The Fisher Body Company.

Both those young men—each a hardworking and skilled artisan with an eighth-grade education—had an equal chance to “make their fortunes.” And that’s what they set out to do. The founder of the Fisher Body Company realized his dream. The founder of the Russell Harness Shop didn’t. After several years as a fairly successful businessman with four employees, he went broke; his biggest account, the Burlington Fire Department, changed from horses to trucks. And when Uncle Elliot died, we had to “pass the hat” to get enough money to bury him.

It would’ve been nice if my uncle had been the one who bet on the car instead of the horse. But it’s not important. The vital element at stake is this: Both were free to try. Nothing else is of any great consequence. It doesn’t really make much difference how it comes out—just so long as everyone is free to try.

And that’s the vital mainspring (freedom to try) that’s being eroded in America today. And of all things, it’s being destroyed in the name of giving everyone an equal chance!

There’s just no way everyone can be equal (we aren’t) or have an equal chance; for there’s no possible arrangement whereby unequal people can have equal chances. And there’s nothing our government can do about it.

But we can quite easily arrange for everyone to be free to try. All we need do is repeal all subsidies, tariffs, and similar interferences by government in the market economy. Then anyone can try who wishes. How he goes about it is his problem and privilege.

If he “bets on the car instead of the horse” and produces a product or service you and I want at a price we’re willing to pay, he’ll get rich—and provide good jobs for the many people who throw in their lots with him. If he fails to provide you and me with what we want, however, he’ll fail, as he should. And, of course, all those who bet on his success will suffer the consequences of their poor judgment.

I simply can’t imagine a better arrangement to encourage maximum production at minimum prices for the largest number of people—just pass no law that prevents anyone from trying.