Quote of the Day: The Folly of All for One

And is not this the point that we have now reached? What is the cry going up everywhere, from all ranks and classes? All for one! When we say the word one, we think of ourselves, and what we demand is to receive an unearned share in the fruits of the labor of all. In other words, we are creating an organized system of plunder. 

Unquestionably, simple out-and-out plunder is so clearly unjust as to be repugnant to us; but, thanks to the motto, all for one, we can allay our qualms of conscience. We impose on others the duty of working for us. Then, we arrogate to ourselves the right to enjoy the fruits of other men's labor. We call upon the state, the law, to enforce our so-called duty, to protect our so-called right, and we end in the fantastic situation of robbing one another in the name of brotherhood. We live at other men's expense, and then call ourselves heroically self-sacrificing for so doing.

(italics original)

This is stirring quote, posted by Café Hayek’s Prof Don Boudreaux, is from Frederic Bastiat‘s 1850 treatise, Economic Harmonies  based on 1964 W. Hayden Boyers translation. Chapter 12, paragraph 21

Quote of the Day: Demand and Supply are Two sides of the Same Coin

It’s not that “supply creates its own demand,” but rather that supply is demand. One produces a good either to consume it oneself or, more commonly, to trade it for another good. Demand and supply are two sides of the same, well, coin—which reminds me to add that Say’s Law holds not just in a barter economy but a monetary one also—a freed one, that is, unlike the corporate state we all occupy.

True, someone might sell a good and not spend the money received. But this would lead to idleness only if the economy did not consist in a time structure of production coordinated by interest rates. In other words, money not spent is saved and available for investment (that is, payments for producer goods and labor, which will be spent on consumer goods) at stages remote from the consumer-goods level; that is, long-term investment in production for future consumption…

Given our insatiable demand for goods, in a freed market a general glut couldn’t happen; if prices were free to fluctuate in response to changed conditions or entrepreneurial error, the price of goods plentiful relative to demand would fall, while the price of goods deficient relative to demand would rise. Entrepreneurs would then adjust their plans, but since change is the rule, the market would never reach a state of rest. Say’s Law is about a (free) process through time, not general equilibrium.

This is from American political writer and libertarian Sheldon Richman at the Reason.com refuting progressives who deliberately misstate the great proto Austrian Frédéric Bastiat’s “Broken Window fallacy” or the fallacious economic doctrine which sees, from the perspective of spending, net benefits from destruction (e.g. natural calamities or wars).

Bastiat on the Twin Doctrines of Luddism and Mercantilism

The great French proto-Austro libertarian Frédéric Bastiat exposes the fallacies of the twin doctrines of Luddism (opposed to modern technology) and mercantilism, which the great Dean of the Austrian school of economics, Murray Rothbard, defines as a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state

The following incisive excerpt, published by the Mises Institute, has been culled from an essay entitled “Human Labor and National Labor” which appeared in Economic Sophisms and in the Bastiat Collection (bold mine)

What misleads the adversaries of machinery and foreign importations is that they judge of them by their immediate and transitory effects, instead of following them out to their general and definite consequences.

The immediate effect of the invention and employment of an ingenious machine is to render superfluous, for the attainment of a given result, a certain amount of manual labor. But its action does not stop there. For the very reason that the desired result is obtained with fewer efforts, the product is handed over to the public at a lower price; and the aggregate of savings thus realized by all purchasers enables them to procure other satisfactions; that is to say, to encourage manual labor in general to exactly the extent of the manual labor which has been saved in the special branch of industry which has been recently improved. So that the level of labor has not fallen, while that of enjoyments has risen.

Let us render this evident by an example.

Suppose there are used annually in this country 10 million hats at 15 shillings each; this makes the sum which goes to the support of this branch of industry £7,500,000 sterling. A machine is invented that allows these hats to be manufactured and sold at 10 shillings. The sum now wanted for the support of this industry is reduced to £5,000,000, provided the demand is not augmented by the change. But the remaining sum of £2,500,000 is not by this change withdrawn from the support of human labor. That sum, economized by the purchasers of hats, will enable them to satisfy other wants, and consequently, to that extent will go to remunerate the aggregate industry of the country. With the five shillings saved, John will purchase a pair of shoes, James a book, Jerome a piece of furniture, etc. Human labor, taken in the aggregate, will continue, then, to be supported and encouraged to the extent of £7,500,000; but this sum will yield the same number of hats, plus all the satisfactions and enjoyments corresponding to £2,500,000 that the employment of the machine has enabled the consumers of hats to save. These additional enjoyments constitute the clear profit that the country will have derived from the invention. This is a free gift, a tribute that human genius will have derived from nature. We do not at all dispute that in the course of the transformation a certain amount of labor will have been displaced; but we cannot allow that it has been destroyed or diminished.

The same thing holds of the importation of foreign commodities. Let us revert to our former hypothesis.

The country manufactures 10 million hats, of which the cost price was 15 shillings. The foreigner sends similar hats to our market, and furnishes them at 10 shillings each. I maintain that the national labor will not be thereby diminished.

For it must produce to the extent of £5,000,000 to enable it to pay for 10 million hats at 10 shillings.

And then there remains to each purchaser five shillings saved on each hat, or in all, £2,500,000, which will be spent on other enjoyments — that is to say, which will go to support labor in other departments of industry.

Then the aggregate labor of the country will remain what it was, and the additional enjoyments represented by £2,500,000 saved upon hats will form the clear profit accruing from imports under the system of free trade.

It is of no use to try to frighten us by a picture of the sufferings that, on this hypothesis, the displacement of labor will entail.

For, if the prohibition had never been imposed, the labor would have found its natural place under the ordinary law of exchange, and no displacement would have taken place.

If, on the other hand, prohibition has led to an artificial and unproductive employment of labor, it is prohibition, and not liberty, that is to blame for a displacement that is inevitable in the transition from what is detrimental to what is beneficial.

Bastiat on the Pretentious Moralism of Mercantilism

Mercantilists operate on the dulcet sound bites that hardly stands on economic laws.

The great French classical liberal Frédéric Bastiat does another splendid demolition job on the supposed moral high grounds supposedly assumed by the mercantilists.

In reality free trade, and not protectionism, advances general social cooperation in society or what we may call as civilization.

Quoting Bastiat: [Mises Institute] (bold mine)

Among the arguments we hear adduced in favor of the restrictive regime we must not forget that which is founded on national independence.

"What should we do in case of war," it is said, "if we are placed at the mercy of England for iron and coal?"

English monopolists do not fail to cry out in their turn:

"What would become of Great Britain in case of war if she is dependent on France for provisions?"

One thing is overlooked, which is this: That the kind of dependence that results from exchange, from commercial transactions, is a reciprocal dependence. We cannot be dependent on the foreigner without the foreigner being dependent on us. Now, this is the very essence of society. To break up natural relations is not to place ourselves in a state of independence, but in a state of isolation.

Note this: A nation isolates itself looking forward to the possibility of war; but is not this very act of isolating itself the beginning of war? It renders war more easy, less burdensome, and, it may be, less unpopular. Let countries be permanent markets for each other's produce; let their reciprocal relations be such that they cannot be broken without inflicting on each other the double suffering of privation and a glut of commodities; and they will no longer stand in need of naval armaments, which ruin them, and overgrown armies, which crush them; the peace of the world will not then be compromised by the caprice of a Thiers or of a Palmerston; and war will disappear for want of what supports it, for want of resources, inducements, pretexts, and popular sympathy.

The short of this is that “when goods don’t cross borders armies will”. Promoting economic isolation is equivalent to promoting poverty and war.

So how can the advocacy of war be considered as moral?

Next mercantilists appeal to the emotion of the public, particularly to morality of material abstinence so as to justify political control over people’s economic activities.

Again Bastiat:

I am quite aware that I shall be reproached (it is the fashion of the day) with basing the fraternity of nations on men's personal interest — vile, prosaic self-interest. Better far, it may be thought, that it should have had its basis in charity, in love, even in a little self-abnegation, and that, interfering somewhat with men's material comforts, it should have had the merit of a generous sacrifice.

When shall we be done with these puerile declamations? When will hypocrisy be finally banished from science? When shall we cease to exhibit this nauseous contradiction between our professions and our practice? We hoot at and execrate personal interest; in other words, we denounce what is useful and good (for to say that all men are interested in anything is to say that the thing is good in itself), as if personal interest were not the necessary, eternal, and indestructible mainspring to which Providence has confided human perfectibility. Are we not represented as being all angels of disinterestedness? And does the thought never occur to those who say so that the public begins to see with disgust that this affected language disfigures the pages of those very writers who are most successful in filling their own pockets at the public expense? Oh! Affectation! Affectation! Thou are verily the besetting sin of our times!

What! Because material prosperity and peace are things correlative, because it has pleased God to establish this beautiful harmony in the moral world, am I not to admire, am I not to adore His ordinances, am I not to accept with gratitude laws that make justice the condition of happiness? You desire peace only in so far as it runs counter to material prosperity; and liberty is rejected because it does not impose sacrifices. If abnegation has indeed so many charms for you, why do you fail to practice it in private life? Society will be grateful to you, for someone, at least, will reap the fruit; but to desire to impose it upon mankind as a principle is the very height of absurdity, for the abnegation of all is the sacrifice of all, which is evil erected into a theory.

But, thank heaven, one can write or read many of these declamations without the world ceasing on that account to obey the social motive force, which leads us to shun evil and seek after good, and which, whether they like it or not, we must denominate personal interest.

After all, it is ironic enough to see sentiments of the most sublime self-denial invoked in support of spoliation itself. See to what this boasted disinterestedness tends! These men who are so fantastically delicate as not to desire peace itself, if it is founded on the vile interest of mankind, put their hand into the pockets of others, and especially of the poor.

For what article of the tariff protects the poor? Be pleased, gentlemen, to dispose of what belongs to yourselves as you think proper, but leave us the disposal of the fruit of our own toil, to use it or exchange it as we see best. Declaim on self-sacrifice as much as you choose, it is all very fine and very beautiful, but be at least consistent.

In reality, advocates of mercantilism hardly practice on what they preach. Since mercantilists believes that they have superior knowledge and the moral ascendancy over the rest, they feel that they are exempt from the rules they prefer or opt to impose on their constituency. They believe that if others ought to sacrifice or embrace abstemiousness, they are exempt.

Of course, alternatively, mercantilism is about political inequality and about special economic privileges accorded by the political class to a favored few (the network of friends and relatives and political allies).

In short, the obverse side of mercantilism is crony-state capitalism.

How then can the protection of the few, through political edicts, at the expense of society (where the populace are subjected to coercive restrictions on economic activities) be considered moral? 

Bastiat on Why Protectionism is a Philosophy of War

Protectionism is a philosophy of war, partly through conquest.

The great classical liberal Frédéric Bastiat destroys the supposed moral high ground of mercantilism which are based on blatant self contradictions. (source Mises Institute, all bold mine)

There is one thing that confounds me, and it is this. Sincere publicists, studying the economy of society from the producer's point of view, have laid down this double formula:

1. "Governments should order the interests of consumers who are subject to their laws, in such a way as to be favorable to national industry."
2. "They should bring distant consumers under subjection to their laws, for the purpose of ordering their interests in a way favorable to national industry."

The first of these formulas gets the name of protection; the second we call outlets, or the creating of markets, or vents, for our produce.

Both are founded on what we call the balance of trade: "A nation is impoverished when it imports; enriched when it exports."

For if every purchase from a foreign country is a tribute paid and a national loss, it follows, of course, that it is right to restrain, and even prohibit, importations.

And if every sale to a foreign country is a tribute received, and a national profit, it is quite right and natural to create markets for our products even by force.

The system of protection and the colonial system are, then, only two aspects of one and the same theory. To hinder our fellow citizens from buying from foreigners, and to force foreigners to buy from our fellow citizens, are only two consequences of one and the same principle.

Now, it is impossible not to admit that this doctrine, if true, makes general utility to repose on monopoly or internal spoliation, and on conquest or external spoliation.

I enter a cottage on the French side of the Pyrenees.

The father of the family has received but slender wages. His half-naked children shiver in the icy north wind; the fire is extinguished, and there is nothing on the table. There are wool, firewood, and corn on the other side of the mountain; but these good things are forbidden to the poor day-laborer, for the other side of the mountain is not in France. Foreign firewood is not allowed to warm the cottage hearth; and the shepherd's children can never know the taste of Biscayan wheat, and the wool of Navarre can never warm their benumbed limbs. General utility has so ordered it. Be it so; but let us agree that all this is in direct opposition to the first principles of justice. To dispose legislatively of the interests of consumers, and postpone them to the supposed interests of national industry, is to encroach upon their liberty — it is to prohibit an act; namely, the act of exchange, that has in it nothing contrary to good morals; in a word, it is to do them an act of injustice.

And yet this is necessary, we are told, unless we wish to see national labor at a standstill, and public prosperity sustain a fatal shock.

Writers of the protectionist school, then, have arrived at the melancholy conclusion that there is a radical incompatibility between justice and utility. 

On the other hand, if it be the interest of each nation to sell, and not to buy, the natural state of their relations must consist in a violent action and reaction, for each will seek to impose its products on all, and all will endeavor to repel the products of each.

A sale, in fact, implies a purchase, and since, according to this doctrine, to sell is beneficial, and to buy is the reverse, every international transaction would imply the amelioration of one people and the deterioration of another.

But if men are, on the one hand, irresistibly impelled toward what is for their profit, and if, on the other, they resist instinctively what is hurtful, we are forced to conclude that each nation carries in its bosom a natural force of expansion, and a not less natural force of resistance, which forces are equally injurious to all other nations; or, in other words, that antagonism and war are the natural state of human society.

Thus the theory we are discussing may be summed up in these two axioms: 

Utility is incompatible with justice at home.

Utility is incompatible with peace abroad.

Now, what astonishes and confounds me is that a publicist, a statesman, who sincerely holds an economical doctrine that runs so violently counter to other principles that are incontestable, should be able to enjoy one moment of calm or peace of mind.

For my own part, it seems to me that if I had entered the precincts of the science by the same gate, if I had failed to perceive clearly that liberty, utility, justice, peace, are things not only compatible, but strictly allied with each other, and, so to speak, identical, I should have endeavored to forget what I had learned, and I should have asked,

"How God could have willed that men should attain prosperity only through injustice and war? How He could have willed that they should be unable to avoid Injustice and War except by renouncing the possibility of attaining prosperity?

"Dare I adopt, as the basis of the legislation of a great nation, a science that thus misleads me by false lights, that has conducted me to this horrible blasphemy, and landed me in so dreadful an alternative? And when a long train of illustrious philosophers have been conducted by this science, to which they have devoted their lives, to more consoling results — when they affirm that liberty and utility are perfectly reconcilable with justice and peace — that all these great principles run in infinitely extended parallels, and will do so to all eternity, without running counter to each other — I would ask, Have they not in their favor that presumption which results from all that we know of the goodness and wisdom of God, as manifested in the sublime harmony of the material creation? In the face of such a presumption, and of so many reliable authorities, ought I to believe lightly that God has been pleased to implant antagonism and dissonance in the laws of the moral world? No; before I should venture to conclude that the principles of social order run counter to and neutralize each other, and are in eternal and irreconcilable opposition — before I should venture to impose on my fellow citizens a system so impious as that to which my reasonings would appear to lead — I should set myself to re-examine the whole chain of these reasonings, and assure myself that at this stage of the journey I had not missed my way."

But if, after a candid and searching examination, 20 times repeated, I arrived always at this frightful conclusion, that we must choose between the right and the good, discouraged, I should reject the science, and bury myself in voluntary ignorance; above all, I should decline all participation in public affairs, leaving to men of another temper and constitution the burden and responsibility of a choice so painful.

Beware of their hypocrisies

Bastiat on the Political Religion of Mercantilism

What I call as political religion is a deeply held or entrenched belief in theory which is in reality signifies as massive self-contradiction, impractical, unrealistic or virtually utopian.

Yet such ideas have been popularly embraced by the vulnerable public primarily because of its “feel good” effects from what seems as “noble sounding” but spurious rhetoric.

Alternatively, what seems plausible—which are principally based on economic ignorance or self-interest from political redistribution or the interests of tax consumers (e.g. beneficiaries from welfare-warfare state,  political agents, captured interest such as private sector funded directly or indirectly by the state and etc…) or personal biases shaped by political ideology—does not square with  economic reality.

The great French classical liberal Frédéric Bastiat explodes on supposed moral high grounds of mercantilism (from Mises Institute) [bold emphasis mine]

The advocates of monopoly maintain that the facts are on their side, and that we have on our side only theory.

They flatter themselves that this long series of public acts, this old experience of Europe, which they invoke, has presented itself as something very formidable to the mind of Mr. Say; and I grant that he has not refuted it with his characteristic sagacity. For my own part, I am not disposed to concede to the monopolists the domain of facts, for they have only in their favor facts that are forced and exceptional; and we oppose to these, facts that are universal, the free and voluntary acts of mankind at large.

What do we say; and what do they say?

We say, "You should buy from others what you cannot make for yourself but at a greater expense."

And they say, "It is better to make things for yourself, although they cost you more than the price at which you could buy them from others."

Now, gentlemen, throwing aside theory, argument, demonstration — all which seem to affect you with nausea — which of these two assertions has on its side the sanction of universal practice? 

Visit your fields, your workshops, your forges, your warehouses; look above, below, and around you; look at what takes place in your own houses; note your own everyday acts; and say what is the principle that guides these laborers, artisans, and merchants; say what is your own personal practice.

Does the farmer make his own clothes? Does the tailor produce the corn he consumes? Does your housekeeper continue to have your bread made at home, after she finds she can buy it cheaper from the baker? Do you resign the pen for the brush to save your paying tribute to the shoeblack? Does the entire economy of society not rest upon the separation of employments, the division of labor — in a word, upon exchange? And what is exchange but a calculation which we make with a view to discontinuing direct production in every case in which we find that possible, and in which indirect acquisition enables us to effect a saving in time and in effort?

It is not you, therefore, who are the men of practice, since you cannot point to a single human being who acts upon your principle.

But you will say, we never intended to make our principle a rule for individual relations. We perfectly understand that this would be to break up the bond of society, and would force men to live like snails, each in his own shell. All that we contend is that our principle regulates de facto the relations that obtain between the different agglomerations of the human family.

Well, I affirm that this principle is still erroneous. The family, the commune, the canton, the department, the province, are so many agglomerations, which all, without any exception, reject practically your principle, and have never dreamt of acting on it. All procure themselves, by means of exchange, those things that it would cost them dearer to procure by means of production. And nations would do the same, did you not hinder them by force.

We, then, are the men of practice and of experience; for we oppose to the restriction you have placed exceptionally on certain international exchanges the practice and experience of all individuals and of all agglomerations of individuals, whose acts are voluntary and can consequently be adduced as evidence. But you begin by constraining, by hindering, and then you lay hold of acts that are forced or prohibited, as warranting you to exclaim, "We have practice and experience on our side!"

You inveigh against our theory, and even against theories in general. But when you lay down a principle in opposition to ours you perhaps imagine you are not proceeding on theory. Clear your heads of that idea. You, in fact, form a theory as we do; but between your theory and ours there is this difference:

Our theory consists merely in observing universal facts, universal opinions, calculations, and ways of proceeding that universally prevail; and in classifying these and rendering them coordinate, with a view to their being more easily understood.

Our theory is so little opposed to practice that it is nothing else but practice explained. We observe men acting as they are moved by the instinct of self-preservation and a desire for progress, and what they thus do freely and voluntarily we denominate political or social economy. We can never help repeating that each individual man is practically an excellent economist, producing or exchanging according as he finds it more to his interest to produce or to exchange. Each, by experience, educates himself in this science; or, rather, the science itself is only this same experience accurately observed and methodically explained.

But on your side you construct a theory in the worst sense of the word. You imagine, you invent, a course of proceeding that is not sanctioned by the practice of any living man under the canopy of heaven; and then you invoke the aid of constraint and prohibition. It is quite necessary that you should have recourse to force, for you desire that men should be made to produce those things that they find it more advantageous to buy; you desire that they should renounce this advantage, and act upon a doctrine that implies a contradiction in terms.

I defy you to take the doctrine, which you acknowledge would be absurd in the relations of individuals, and extend it, even in speculation, to transactions between families, communities, or provinces. By your own admission it is only applicable to international relations.

This is the reason why you are forced to keep repeating, "There are no absolute principles, no inflexible rules. What is good for an individual, a family, a province, is bad for a nation. What is good in detail — namely, to purchase rather than produce, when purchasing is more advantageous than producing — that same is bad in the gross. The political economy of individuals is not that of nations" — and other nonsense of the same kind.

And to what does all this tend? Look at it a little closer. The intention is to prove that we, the consumers, are your property! — that we are yours body and soul! — that you have an exclusive right over our stomachs and our limbs! — that it belongs to you to feed and clothe us on your own terms, whatever be your ignorance, incapacity or rapacity!

No, you are not men of practice; you are men of abstraction — and of extortion.

The path to hell is paved with good intentions. This so applies to the nirvana fallacy based doctrine called mercantilism, which in reality represents an instrument for political and economic repression.

Bastiat on Why Protectionism Fails: Money is Not Wealth

One of the fundamental flaws of protectionism have been to mistake money, which is a medium of exchange, for wealth. Thus, the obsession by the mainstream for inflationism-protectionism as popular political solutions to economic predicaments.

The great classical liberal Frédéric Bastiat explodes this myth more than a century back. (From Mises Institute/The Bastiat Collection) [bold emphasis mine]

Do you desire to be in a situation to decide between liberty and protection? Do you desire to appreciate the impact of an economic phenomenon? Inquire into its effects upon the abundance or scarcity of commodities, and not upon the rise or fall of prices. Distrust nominal prices; they will only land you in an inextricable labyrinth.

Mr. Matthieu de Dombasle, after having shown that protection raises prices, adds:

"The enhancement of prices increases the expense of living, and consequently the price of labor, and each man receives, in the enhanced price of his products, compensation for the higher prices he has been obliged to pay for the things he has occasion to buy. Thus, if everyone pays more as a consumer, everyone receives more as a producer."

It is evident that we could reverse this argument, and say:

"If everyone receives more as a producer, everyone pays more as a consumer."

Now, what does this prove? Nothing but this, that protection displaces wealth uselessly and unjustly. In so far, it simply perpetrates spoliation.

Again, to conclude that this vast apparatus leads to simple compensations, we must stick to the "consequently" of Mr. de Dombasle, and make sure that the price of labor will not fail to rise with the price of the protected products. This is a question of fact that I remit to Mr. Moreau de Jonnes, that he may take the trouble to find out whether the rate of wages advances along with the price of shares in the coal mines of Anzin. For my own part, I do not believe that it does; because, in my opinion, the price of labor, like the price of everything else, is governed by the relation of supply to demand. Now, I am convinced that restriction diminishes the supply of coal, and consequently enhances its price; but I do not see so clearly that it increases the demand for labor, so as to enhance the rate of wages; and that this effect should be produced is all the less likely, because the quantity of labor demanded depends on the available capital. Now, protection may indeed displace capital, and cause its transference from one employment to another, but it can never increase it by a single farthing.

But this question, which is one of the greatest interest and importance, will be examined in another place. I return to the subject of nominal price; and I maintain that it is not one of those absurdities that can be rendered specious by such reasonings as those of Mr. de Dombasle.

Put the case of a nation that is isolated, and possesses a given amount of specie, and that chooses to amuse itself by burning each year one-half of all the commodities that it possesses. I undertake to prove that, according to the theory of Mr. de Dombasle, it will not be less rich.

In fact, in consequence of the fire, all things will be doubled in price, and the inventories of property, made before and after the destruction, will show exactly the same nominal value. But then what will the country in question have lost? If John buys his cloth dearer, he also sells his corn at a higher price; and if Peter loses on his purchase of corn, he retrieves his losses by the sale of his cloth. "Each recovers, in the extra price of his products, the extra expense of living he has been put to; and if everybody pays as a consumer, everybody receives a corresponding amount as a producer."

All this is a jingling quibble, and not science. The truth, in plain terms, is this: that men consume cloth and corn by fire or by using them, and that the effect is the same as regards money, but not as regards wealth, for it is precisely in the use of commodities that wealth or material prosperity consists.

In the same way, restriction, while diminishing the abundance of things, may raise their price to such an extent that each party shall be, pecuniarily speaking, as rich as before. But to set down in an inventory three measures of corn at 20s., or four measures at 15s., because the result is still 60s. — would this, I ask, come to the same thing with reference to the satisfaction of men's wants?

It is to this, the consumer's point of view, that I shall never cease to recall the protectionists, for this is the end and design of all our efforts, and the solution of all problems. I shall never cease to say to them: Is it, or is it not, true that restriction by impeding exchanges, by limiting the division of labor, by forcing labor to connect itself with difficulties of climate and situation, diminishes ultimately the quantity of commodities produced by a determinate amount of efforts? And what does this signify, it will be said, if the smaller quantity produced under the regime of protection has the same nominal value as that produced under the regime of liberty? The answer is obvious. Man does not live upon nominal values, but upon real products, and the more products there are, whatever be their price, the richer he is.

In writing what precedes, I never expected to meet with an anti-economist who was enough of a logician to admit, in so many words, that the wealth of nations depends on the value of things, apart from the consideration of their abundance. But here is what I find in the work of Mr. de Saint-Chamans (p. 210):

If fifteen million worth of commodities, sold to foreigners, are taken from the total production, estimated at fifty millions, the thirty-five million worth of commodities remaining, not being sufficient to meet the ordinary demand, will increase in price, and rise to the value of fifty millions. In that case the revenue of the country will represent a value of fifteen million additional.… There would then be an increase of the wealth of the country to the extent of fifteen million, exactly the amount of specie imported.

This is a pleasant view of the matter! If a nation produces in one year, from its agriculture and commerce, a value of 50 million it has only to sell a quarter of it to the foreigner to be a quarter richer! Then if it sells the half, it will be one-half richer! And if it should sell the whole, to its last tuft of wool and its last grain of wheat, it would bring up its revenue to 100 million. What a way of getting rich, by producing infinite dearness by absolute scarcity!

Again, would you judge of the two doctrines? Submit them to the test of exaggeration.

According to the doctrine of Mr. de Saint-Chamans, the French would be quite as rich — that is to say, quite as well supplied with all things — had they only a thousandth part of their annual products, because they would be worth a thousand times more.

According to our doctrine, the French would be infinitely rich if their annual products were infinitely abundant, and consequently, without any value at all.

Think of it, if you alone have been stranded in a remote and inaccessible island inhabited by primitive tribes, what will your bag filled with $10 million buy (if they should accept your greenbacks at all)?

Bastiat on The Case for Unilateral Free Trade

The great Frédéric Bastiat makes the case for unilateral free trade. (source Mises Institute)

We have just seen that whatever increases the expense of conveying commodities from one country to another — in other words, whatever renders transport more onerous — acts in the same way as a protective duty; or if you prefer to put it in another shape, that a protective duty acts in the same way as more onerous transport.

A tariff, then, may be regarded in the same light as a marsh, a rut, an obstruction, a steep declivity — in a word, it is an obstacle, the effect of which is to augment the difference between the price the producer of a commodity receives and the price the consumer pays for it. In the same way, it is undoubtedly true that marshes and quagmires are to be regarded in the same light as protective tariffs.

There are people (few in number, it is true, but there are such people) who begin to understand that obstacles are not less obstacles because they are artificial, and that our mercantile prospects have more to gain from liberty than from protection, and exactly for the same reason that makes a canal more favorable to traffic than a steep, roundabout, and inconvenient road.

But they maintain that this liberty must be reciprocal. If we remove the barriers we have erected against the admission of Spanish goods, for example, Spain must remove the barriers she has erected against the admission of ours. They are, therefore, the advocates of commercial treaties, on the basis of exact reciprocity, concession for concession; let us make the sacrifice of buying, say they, to obtain the advantage of selling.

People who reason in this way, I am sorry to say, are, whether they know it or not, protectionists in principle; only, they are a little more inconsistent than pure protectionists, as the latter are more inconsistent than absolute prohibitionists.

The following apologue will demonstrate this.

Stulta and Puera

There were, no matter where, two towns called Stulta and Puera. They completed at great cost a highway from the one town to the other. When this was done, Stulta said to herself, "See how Puera inundates us with her products; we must see to it." In consequence, they created and paid a body of obstructives, so called because their business was to place obstacles in the way of traffic coming from Puera. Soon afterwards Puera did the same.

At the end of some centuries, knowledge having in the interim made great progress, the common sense of Puera enabled her to see that such reciprocal obstacles could only be reciprocally hurtful. She therefore sent an envoy to Stulta, who, laying aside official phraseology, spoke to this effect: "We have made a highway, and now we throw obstacles in the way of using it. This is absurd. It would have been better to have left things as they were. We should not, in that case, have had to pay for making the road in the first place, nor afterwards have incurred the expense of maintaining obstructives. In the name of Puera, I come to propose to you, not to give up opposing each other all at once — that would be to act upon a principle, and we despise principles as much as you do — but to lessen somewhat the present obstacles, taking care to estimate equitably the respective sacrifices we make for this purpose." So spoke the envoy. Stulta asked for time to consider the proposal, and proceeded to consult, in succession, her manufacturers and agriculturists. At length, after the lapse of some years, she declared that the negotiations were broken off.

On receiving this intimation, the inhabitants of Puera held a meeting. An old gentleman (they always suspected he had been secretly bought by Stulta) rose and said, "The obstacles created by Stulta injure our sales, which is a misfortune. Those we have ourselves created injure our purchases, which is another misfortune. With reference to the first, we are powerless; but the second rests with ourselves. Let us, at least, get rid of one, since we cannot rid ourselves of both evils. Let us suppress our obstructives without requiring Stulta to do the same. Some day, no doubt, she will come to know her own interests better."

A second counselor, a practical, matter-of-fact man, guiltless of any acquaintance with principles, and brought up in the ways of his forefathers, replied: "Don't listen to that Utopian dreamer, that theorist, that innovator, that economist, that Stultomaniac. We shall all be undone if the stoppages of the road are not equalized, weighed, and balanced between Stulta and Puera. There would be greater difficulty in going than in coming, in exporting than in importing. We should find ourselves in the same condition of inferiority relatively to Stulta as Havre, Nantes, Bordeaux, Lisbon, London, Hamburg, and New Orleans are with relation to the towns situated at the sources of the Seine, the Loire, the Garonne, the Tagus, the Thames, the Elbe, and the Mississippi, for it is more difficult for a ship to ascend than to descend a river. (A Voice: Towns at the mouths of rivers prosper more than towns at their source.)

"This is impossible. (Same Voice: But it is so.) Well, if it be so, they have prospered contrary to rules." Reasoning so conclusive convinced the assembly, and the orator followed up his victory by talking largely of national independence, national honor, national dignity, national labor, inundation of products, tributes, murderous competition. In short, he carried the vote in favor of the maintenance of obstacles; and if you are at all curious on the subject, I can point out to you countries where you will see with your own eyes road makers and obstructives working together on the most friendly terms possible, under the orders of the same legislative assembly, and at the expense of the same taxpayers, the one set endeavoring to clear the road, and the other set doing their utmost to render it impassable.

The following passage resonates on the political stumbling block, mentioned by Bastiat above, for unilateral free trade:

The compelling economic case for unilateral free trade carries hardly any weight among people who really matter…

But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports—no matter how expensive to produce in terms of other opportunities foregone—is a victory, and an increase in imports—no matter how many resources it releases for other uses—is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense—but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.

This was written by then international trade economist Paul Krugman in 1997 prior to his tergiversation of the free trade doctrine to become consumed by the forces of mercantilism whom he once condemned. (hat tip Professor Don Boudreaux) Given the temptations to power from "the economist who wants to influence that policy", Mr. Krugman reminds me of the transformation of Anakin Skywalker into Darth Vader

Bastiat on Mercantalism: The Candle Maker's Petition

Many intellectually incapacitated or practitioners of political religion frequently use pretentious economic arguments on what they perceive as threat of competition posed by anything foreign on the local economy: be it immigrants, trade, investments, capital flows, education, jobs and etc…

Xenophobia thus calls for the government to institute protectionist measures (mercantilism) to supposedly achieve their brand of utopia. Never mind if history keeps proving that closed economies leads to a path of poverty.

In reality, these xenophobes apply the fallacy of reductio ad absurdum when they oversimplify what truly is a complex world, and forget or deliberately ignore or discount the large influences of technology, globalization, inflationism (boom bust cycles) that reduces capital thereby jobs, as well as other forms of interventionism via regulations and taxes that all affect people’s incentives and time preferences on allocation of capital.

The great Frédéric Bastiat exposes on the absurdity and ridiculosity of the mercantilist argument through the classic The Candle Maker’s Petition (From Mises.org) [bold emphasis mine]

Petition of the Manufacturers of Candles, Waxlights, Lamps, Candlelights, Street Lamps, Snuffers, Extinguishers, and the Producers of Oil, Tallow, Resin, Alcohol, and, Generally, of Everything Connected with Lighting

To the Members of the Chamber of Deputies.

Gentlemen:

You are on the right road. You reject abstract theories, and have little consideration for cheapness and plenty. Your chief care is the interest of the producer. You desire to protect him from foreign competition and reserve the national market for national industry.

We are about to offer you an admirable opportunity of applying your — what shall we call it? — your theory? No; nothing is more deceptive than theory — your doctrine? your system? your principle? But you dislike doctrines, you abhor systems, and as for principles you deny that there are any in social economy. We shall say, then, your practice — your practice without theory and without principle.

We are suffering from the intolerable competition of a foreign rival, placed, it would seem, in a condition so far superior to ours for the production of light that he absolutely inundates our national market with it at a price fabulously reduced. The moment he shows himself, our trade leaves us — all consumers apply to him; and a branch of native industry, having countless ramifications, is all at once rendered completely stagnant. This rival, who is none other than the sun, wages war mercilessly against us, and we suspect that he has been raised up by perfidious Albion (good policy nowadays), inasmuch as he displays toward that haughty island a circumspection with which he dispenses in our case.

What we pray for is that it may please you to pass a law ordering the shutting up of all windows, skylights, dormer-windows, outside and inside shutters, curtains, blinds, bull's-eyes; in a word, of all openings, holes, chinks, clefts, and fissures, by or through which the light of the sun has been in use to enter houses, to the prejudice of the meritorious manufactures with which we flatter ourselves that we have accommodated our country — a country that, in gratitude, ought not to abandon us now to a strife so unequal.

We trust, gentlemen, that you will not regard this our request as a satire, or refuse it without at least first hearing the reasons which we have to urge in its support.

And, first, if you shut up as much as possible all access to natural light, and create a demand for artificial light, which of our French manufactures will not be encouraged by it?

If more tallow is consumed, then there must be more oxen and sheep; and, consequently, we shall behold the multiplication of meadows, meat, wool, hides, and above all, manure, which is the basis and foundation of all agricultural wealth.

If more oil is consumed, then we shall have an extended cultivation of the poppy, of the olive, and of rape. These rich and soil-exhausting plants will come at the right time to enable us to avail ourselves of the increased fertility that the rearing of additional cattle will impart to our lands.

Our heaths will be covered with resinous trees. Numerous swarms of bees will, on the mountains, gather perfumed treasures, now wasting their fragrance on the desert air, like the flowers from which they emanate. Thus, there is no branch of agriculture that shall not greatly develop.

The same remark applies to navigation. Thousands of vessels will proceed to the whale fishery; and in a short time, we shall possess a navy capable of maintaining the honor of France, and gratifying the patriotic aspirations of your petitioners, the undersigned candlemakers and others.

But what shall we say of the manufacture of articles de Paris? Henceforth, you will behold gildings, bronzes, crystals in candlesticks, in lamps, in lustres, in candelabra, shining forth in spacious showrooms, compared with which, those of the present day can be regarded but as mere shops.

No poor resinier from his heights on the seacoast, no coal miner from the depth of his sable gallery, but will rejoice in higher wages and increased prosperity.

Only have the goodness to reflect, gentlemen, and you will be convinced that there is perhaps no Frenchman, from the wealthy coalmaster to the humblest vendor of lucifer matches, whose lot will not be ameliorated by the success of this our petition.

We foresee your objections, gentlemen, but we know that you can oppose to us none but such as you have picked up from the effete works of the partisans of Free Trade. We defy you to utter a single word against us which will not instantly rebound against yourselves and your entire policy.

You will tell us that, if we gain by the protection we seek, the country will lose by it, because the consumer must bear the loss.

We answer: 

You have ceased to have any right to invoke the interest of the consumer; for, whenever his interest is found opposed to that of the producer, you sacrifice the former. You have done so for the purpose of encouraging labor and increasing employment. For the same reason you should do so again.

You have yourselves obviated this objection. When you are told that the consumer is interested in the free importation of iron, coal, corn, textile fabrics — yes, you reply, but the producer is interested in their exclusion. Well, be it so; if consumers are interested in the free admission of natural light, the producers of artificial light are equally interested in its prohibition.

But, again, you may say that the producer and consumer are identical. If the manufacturer gains by protection, he will make the agriculturist also a gainer; and if agriculture prospers, it will open a vent to manufactures.

Very well! If you confer upon us the monopoly of furnishing light during the day, first of all we shall purchase quantities of tallow, coals, oils, resinous substances, wax, alcohol — besides silver, iron, bronze, crystal — to carry on our manufactures; and then we, and those who furnish us with such commodities, having become rich will consume a great deal and impart prosperity to all the other branches of our national industry.

If you urge that the light of the sun is a gratuitous gift of nature, and that to reject such gifts is to reject wealth itself under pretense of encouraging the means of acquiring it, we would caution you against giving a death-blow to your own policy. 

Remember that hitherto you have always repelled foreign products, because they approximate more nearly than home products the character of gratuitous gifts. To comply with the exactions of other monopolists, you have only half a motive; and to repulse us simply because we stand on a stronger vantage-ground than others would be to adopt the equation + × + = − ; in other words, it would be to heap absurdity upon absurdity. 

Nature and human labor cooperate in various proportions (depending on countries and climates) in the production of commodities. The part nature executes is always gratuitous; it is the part executed by human labor that constitutes value and is paid for. 

If a Lisbon orange sells for half the price of a Paris orange, it is because natural, and consequently gratuitous, heat does for one what artificial, and therefore expensive, heat must do for the other.

When an orange comes to us from Portugal, we may conclude that it is furnished in part gratuitously, in part for an onerous consideration; in other words, it comes to us at half price as compared with those of Paris.

Now, it is precisely this semigratuity (pardon the word) that we contend should be excluded. You say, How can national labor sustain competition with foreign labor, when the former has all the work to do, and the latter only does one-half, the sun supplying the remainder?

But if this half, being gratuitous, determines you to exclude competition, how should the whole, being gratuitous, induce you to admit competition? If you were consistent, you would, while excluding as hurtful to native industry what is half gratuitous, exclude a fortiori and with double zeal that which is altogether gratuitous.

Once more, when products such as coal, iron, corn, or textile fabrics are sent us from abroad, and we can acquire them with less labor than if we made them ourselves, the difference is a free gift conferred upon us. The gift is more or less considerable in proportion as the difference is more or less great.

It amounts to a quarter, a half, or three-quarters of the value of the product, when the foreigner only asks us for three-fourths, a half, or a quarter of the price we should otherwise pay. It is as perfect and complete as it can be when the donor (like the sun in furnishing us with light) asks us for nothing.

The question, and we ask it formally, is this: Do you desire for our country the benefit of gratuitous consumption or the pretended advantages of onerous production? Make your choice, but be logical; for as long as you exclude, as you do, coal, iron, corn, foreign fabrics, in proportion as their price approximates to zero, what inconsistency it would be to admit the light of the sun, the price of which is already at zero during the entire day!

At the end of the day, in the world of politics, logic and the basic law of demand and supply gets swallowed by the black hole of preposterous political correctness.

As Julius Caesar once said,

Men in general are quick to believe that which they wish to be true

Validating Bastiat: France’s Hollande Scales Back on Wealthy Taxes

Perhaps in the realization that many of the wealthy French, whom have been targeted by the President François Hollande’s “soak the rich” policies, have been exploring overseas refuge, the French government appears to have signaled the softening, if not a subtle backtracking of the proposed repressive taxes on the wealthy.

These mostly through the insertions of many loopholes that essentially enervates the proposed populist statute.

From the CNBC,

News reports in France today say the tax has been tweaked so that it will only effect 1,000 households. And that’s if it passes – which remains a big question.

The French newspapers Les Echos and Le Figaro both say today that the tax being considered would only be levied on income of more than 2 million euros. That’s double the original cut-off.

There may also be other changes. Rather than applying to all income, the tax may only apply to ordinary income from salaries. If investment income or capital gains is excluded, the wealthy French who make their money from investments need not worry.

The tax also makes special provisions for athletes and artists, carves out social security taxes and ... you get the idea. Pretty soon, it’s not anything like a 75 percent tax on million-plus earners.

Considering the precarious state of the French fiscal conditions, it would amount to absurdity for politicians and their imbecilic followers to think that tax increases by in itself would solve the looming risks of a debt crisis. The idea that people will behave like automatons, and fawningly submit to edict, is sheer fantasy.

chart from tradingeconomics.com

Taxes are always political.

They are instruments to what the great French classical liberal Frederic Bastiat called as “Government is the great fiction through which everybody endeavors to live at the expense of everybody else”

Yet people’s subjective take on taxes will mean a change on incentives to save, produce and consume or economic activities, as well as changes, in the approach towards treatment of taxation.

At certain levels, people may find taxes to become an unbearable burden and thus would work to preserve on their savings through circumventing actions, such as the employment of accountants and tax lawyers to exploit on loopholes, seek refuge elsewhere, bribe authorities, influence policies or even incite or join revolutions.

The inherent structural self-contradiction through promises of undeliverable benefits from the limitations of resources the state can generate from taxation, as wonderfully explained by the great Frederic Bastiat [Government, 1848] (bold added)

There is the public on one side, Government on the other, considered as two distinct beings; the latter bound to bestow upon the former, and the former having the right to claim from the latter, all imaginable human benefits. What will be the consequence?

In fact, Government is not maimed, and cannot be so. It has two hands - one to receive and the other to give; in other words, it has a rough hand and a smooth one. The activity of the second necessarily subordinate to the activity of the first. Strictly, Government may take and not restore. This is evident, and may be explained by the porous and absorbing nature of its hands, which always retain a part, and sometimes the whole, of what they touch. But the thing that never was seen, and never will be seen or conceived, is, that Government can restore to the public more than it has taken from it. It is therefore ridiculous for us to appear before it in the humble attitude of beggars. It is radically impossible for it to confer a particular benefit upon any one of the individualities which constitute the community, without inflicting a greater injury upon the community as a whole.

Our requisitions, therefore, place it in a dilemma. If it refuses to grant the requests made to it, it is accused of weakness, ill-will, and incapacity. If it endeavors to grant them, it is obliged to load the people with fresh taxes - to do more harm than good, and to bring upon itself from another quarter the general displeasure.

Thus, the public has two hopes, and Government makes two promises - many benefits and no taxes. Hopes and promises, which, being contradictory, can never be realized.

Mr. Bastiat also shows that unrealizable political promises leads towards unsustainable debt and bankruptcy…

These two promises are for ever clashing with each other; it cannot be otherwise. To live upon credit, which is the same as exhausting the future, is certainly a present means of reconciling them: an attempt is made to do a little good now, at the expense of a great deal of harm in future. But such proceedings call forth the spectre of bankruptcy, which puts an end to credit.

…as well as, the perpetual search for the elusive “something from nothing” elixir by the gullible public on promises made by politicians.

What is to be done then? Why, then, the new Government takes a bold step; it unites all its forces in order to maintain itself; it smothers opinion, has recourse to arbitrary measures, ridicules its former maxims, declares that it is impossible to conduct the administration except at the risk of being unpopular; in short, it proclaims itself governmental. And it is here that other candidates for popularity are waiting for it. They exhibit the same illusion, pass by the same way, obtain the same success, and are soon swallowed up in the same gulf.

Events in France and the Eurozone have simply been upholding Bastiat’s predictions, and mostly importantly, his classical liberal principles.

Understanding Political Terminologies 3: Frédéric Bastiat on Mercantilism

Why is it very easy to sell political crap? Because all one needs is to broach information that caters to heuristics and emotionalism.

In the case of mercantilism or protectionism, the great Frédéric Bastiat wrote of how the public can easily be swayed by falsehoods,

We must confess that our adversaries have a marked advantage over us in the discussion. In very few words they can announce a half-truth; and in order to demonstrate that it is incomplete, we are obliged to have recourse to long and dry dissertations.

This arises from the nature of things. Protection concentrates on one point the good which it produces, while the evils it inflicts are spread over the masses. The one is visible to the naked eye; the other only to the eye of the mind. In the case of liberty, it is just the reverse.

In the treatment of almost all economic questions we find it to be so.

You say: Here is a machine that has turned 30 workmen onto the street.

Or: Here is a spendthrift who encourages every branch of industry.

Or: The conquest of Algeria has doubled the trade of Marseilles.

Or: The budget secures subsistence for 100,000 families.

You are understood at once and by all. Your propositions are in themselves clear, simple, and true. What are your deductions from them?

Machinery is an evil.

Luxury, conquests, and heavy taxation are productive of good.

And your theory receives wide support in that you are in a situation to support it by reference to undoubted facts.

On our side, we must decline to confine our attention to the cause and its direct and immediate effect. We know that this very effect in its turn becomes a cause. To judge correctly of a measure, then, we must trace it through the whole chain of effects to its final result. In other words, we are forced to reason upon it.

To the unwitting public, if you tell lies that are big enough and keep repeating it, people will eventually come to believe it.

And that’s why even centuries after being debunked or being refuted by classical economics and by classical liberals, the spirit of mercantilism has remained politically popular.

This only exhibits that because many seem to have hardly been capable to think beyond their emotions, they become instruments for oppression, especially through the tyranny of mob-rule (democracy), by scheming politicians and their institutional followers.

Misrepresenting Frédéric Bastiat and the Black Swan Theory

Populist financial analyst John Mauldin seem to have misrepresented Frédéric Bastiat in his latest outlook.

Mr. Mauldin writes of Frédéric Bastiat,

He was a strong proponent of limited government and free trade, but he also advocated that subsidies (read, stimulus?) should be available for those in need, "... for urgent cases, the State should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions."

Really?

Here is the complete quotation from the great Frédéric Bastiat in Justice and fraternity, in Journal des Économistes, 15 June 1848, page 313 (Wikipedia.org) [quoted from Bastiat.org, bold emphasis mine, italics as per Mr. Mauldin’s quote]

When a great number of families, all of whom, whether in isolation or in association, need to work in order to live, to prosper, and to better themselves, pool some of their forces, what can they demand of this common force save the protection of all persons, all products of labor, all property, all rights, all interests? Is this anything else than universal justice? Evidently, the right of each is limited by the absolutely similar right of all the others. The law, then, can do no more than recognize this limit and see that it is respected. If it were to permit a few to infringe this limit, this would be to the detriment of others. The law would be unjust. It would be still more so if, instead of tolerating this encroachment, it ordered it.

Suppose property is involved, for example. The principle is that what each has produced by his labor belongs to him, the more so as this labor has been comparatively more or less skillful, continuous, successful, and, consequently, more or less productive. What if two workers wish to unite their forces, to share the common product according to mutually agreed-upon terms, or to exchange their products between them, or if one should make a loan or a gift to the other? What has this to do with the law? Nothing, it seems to me, if the law has only to require the fulfillment of contracts and to prevent or punish misrepresentation, violence, and fraud.

Does this mean that it forbids acts of self-sacrifice and generosity? Who could have such an idea? But will it go so far as to order them? This is precisely the point that divides economists from socialists. If the socialists mean that under extraordinary circumstances, for urgent cases, the state should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions, we will, of course, agree. This is done now; we desire that it be done better. There is, however, a point on this road that must not be passed; it is the point where governmental foresight would step in to replace individual foresight and thus destroy it. It is quite evident that organized charity would, in this case, do much more permanent harm than temporary good.

Bastiat was for subsidies (stimulus)? Go figure.

This is a nice example of doublespeak or the language that deliberately distorts or reverses the meaning of the words or statement—usually employed in politics. Yes just pick out an excerpt from which to stress one’s bias, even if these had been taken out of context.

Oh by the way, Mr. John Mauldin may have also misread the Black Swan Theory

He writes,

A Black Swan is a random event, something that takes us all by surprise. Economic Black Swans are actually quite rare. 9/11 and the aftermath was a true Black Swan.

This barely represents the definition of the theory

According to the book description of Nassim Taleb’s Black Swan: The Impact of Highly Improbable [bold emphasis mine]

A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was…

Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the “impossible.”

For years, Taleb has studied how we fool ourselves into thinking we know more than we actually do. We restrict our thinking to the irrelevant and inconsequential, while large events continue to surprise us and shape our world.

Black swans appear to be random when they are products of OUR failure to "take into consideration what we don’t know”. In short, the knowledge problem

For instance, 9/11 was considered a black swan for the victims, but not for the terrorists.

Mr. Taleb alludes to the Turkey problem as model for the Black Swan theory: For the turkey—after months of fattening who suddenly have been put into the dinner table for Thanksgiving—would be a (surprise) black swan, but not for the butcher.

This applies to the financial markets as well.