Originally posted by me at The Cause of Liberty
While driving last week, I overheard a video my children were watching (The Magic Schoolbus) about the critical interrelations that take place in the environment.
The story was about how putting artificial turf down (to keep the area clean) in a patch of rain forest resulted in the cocoa trees not making any cocoa beans. The artificial turf drove away the peccaries that were splashing mud onto the trees. The mud served as a habitat for the midge flies that pollenated the cocoa tree flowers allowing it to bear fruit.
So what do cocoa trees not being pollinated have to do with Frederic Bastiat?
In 1850, Bastiat wrote an essay entitled What is Seen and What is Not Seen. The opening paragraph states:
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come — at the risk of a small present evil.
The interconnectedness of the environment on the planet is real. One cannot disturb one portion of the ecosystem without affecting others. Most of us understand this intuitively.
However, for some reason the interconnectedness of the economy escapes the grasp of most Americans. Most don’t understand the long-term and widespread ramifications of government spending. We don’t understand that subsidizing something doesn’t fix the problem.
We don’t understand that when the government “creates jobs” by misallocating tax revenue received from the people, it prevents millions of more legitimate jobs to be created in the free market.
We don’t understand that throwing a proposed $2.5 trillion at the banks on Wall Street will worsen the problem because it rewards bad behavior and preserves institutions that are failing. Those banks who have mismanaged themselves need to go out of business. Most don’t understand that recession is the cure for the disease of over-consumption that has plagued individual Americans and our government.
Just as all aspects and components of the environment are interconnected, so too is economic activity. The economy is governed by the laws of cause and effect and any interventions we attempt have long-term consequences.
Just as making an artificial intervention into the rain forest floor causes a reaction of effects, making artificial economic interventions, especially inflating the money supply, will cause the chain reaction of easy credit, over-consumption, high supply, over-supply, glut of product, dropping prices, and recession.
If the recession is mitigated through other artificial means, the situation will never be allowed to correct itself.
In the video my children were watching the solution was to recognize the natural laws that were at work, to remove the artificial turf, and to allow nature to “take its course.” Let’s find ways to use these natural environmental laws to teach the true concept of cause and effect in economics.