Bastiat and "Full Employment"
Matthew Yglesias makes the same mistake as Brad DeLong, thinking that Bastiat’s argument against breaking windows applies only in conditions of “full employment.” Bastiat “doesn’t counter any Keynesian or monetarist points about the viability of stimulus during a recession induced by nominal shocks, it involves assuming that no such recessions can occur even though they plainly do . . . . [T]hat’s no excuse for people sitting around in 2012 to be pounding the table with an old book that’s non-responsive to modern issues professing to be baffled why people don’t find it more persuasive.”
Of course, Bastiat’s brilliant demonstration of hidden costs and the fallacy of spending one’s way into prosperity assumes nothing of the sort. But Yglesias, inadvertently, makes an important point, namely that Bastiat’s defenders should spend more time on “full employment,” a concept that isn’t even coherent, given that efficiency in resource employment makes sense only with regard to the subjective production plan of the entrepreneur (cf. Penrose, 1959; Kirzner, 1966).
W. H. Hutt’s powerful and underappreciated critique of Keynes, The Theory of Idle Resources (1939) attacks this core Keynesian concept. As Hutt explains, all resources have alternative uses, and even “idleness” is a use, in the sense that the resource owner prefers to hold the resource for a future, as-yet-unavailable or unimagined use — a real option, if you like. Dragooning such resources into some random use, outside the price mechanism, serves no productive purpose. Even outside the mythical world of “full employment,” there are no free lunches. The modern Keynesian and monetarist approaches that impress Yglesias have yet to confront this basic problem.
See also Sheldon Richman.