Robbing Sketchers to pay Autoglass

Today I want to meander off into a slightly odd region of defence procurement and talk about a chap called Frederic Bastiat, a 19th Century French political economist and classical liberal, who did much work on the subject of Opportunity Cost (The relative value of one course of action over other alternatives), which led to his 1850 essay "That Which Is Seen, and That Which Is Not Seen", which included a section that has since become known as "the parable of the broken window".

It's another one of those terribly exciting things (as you can imagine) that I've been looking into recently, after a brief summary caught my eye a few months back. With all the talk we often here about how x amount of government money could be spent on y defence industrial capability, creating jobs etc, there is probably not a more apt avenue to investigate than that of opportunity cost.

To start getting to grips with the idea, we'll look at this parable of the broken window.

Essentially Bastiat tells the story of a shopkeeper who finds one of his windows broken by his careless (and soon to be adopted) son. Locals passing by comment on the shopkeepers misfortune, but offer the sagely piece of wisdom that at least it will provide some employment for the local glazier, for what would glaziers do if not for broken windows?

Bastiat acknowledges the basic logic of the argument, but cautions that the effect is only that which can be seen and under no circumstances should the breaking of windows be considered a good thing.

He remarks that if the window cost six francs to replace then the unseen consequence of this accident is that the shopkeeper is now six francs poorer for no appreciable gain. He has his window back, which means he's back to square one, but is now six francs worse off.

Bastiat questions what would - had the window not been broken - the shopkeeper have spent his money on? Perhaps a new pair of shoes? Or a book? So while it's correct to argue that the glaziers trade has been boosted by six francs, potentially the bookseller or the cobbler has now lost out. Our shopkeeper could have spent the six francs just the same, but this time he would have benefited from the purchase of a new pair of shoes or a new book to read, instead of just paying to restore his property to its original form.

Of the two possible outcomes (one where the window is broken and the other where it is not) the second is generally preferable to the first. The same amount of money has been spent, but the shopkeeper receives a better outcome. Thus society has lost value by the breaking of the window.

Bastiat uses this example to infer that; "we must assent to a maxim which will make the hair of protectionists stand on end—To break, to spoil, to waste, is not to encourage national labour; or, more briefly, "destruction is not profit.""

He goes on to share a variety of other examples that we won't go into here which, ironically enough for this blog, includes an argument about whether to keep or disband a unit of soldiers. Basically though all of the examples follow the common theme; taking money from one place to spend in another provides a visible benefit, but it also contains a hidden penalty. Money can only be spent in one place.

Thus we have to stop and think for a second when we discuss the matter of using government money on certain projects in the name of creating jobs and investment.

I have to admit that I don't agree with everything Bastiat says in his essay. He acknowledges that if there is a great benefit to society to be had by taxing people and spending that money elsewhere (such as the minimum level of spending on defence required to secure the nation) then it is acceptable, but he does somewhat underplay the value that can be had from some level of additional taxation.

If, for example, I were to tax this nation of 60 million people an extra 2p a year per head, that's £1.2m that could be spent on various public schemes. It's difficult to argue that as individuals we could put that 2p per year to better use (a sherbet saucer perhaps? Or a cola bottle) than we could by collectively pooling our money for one or two larger causes.

But broadly speaking Bastiat has a point that is worth examining. This goes doubly so in the defence sector.

Now before anyone takes up arms against me and excuses me of lobbying against defence, that's not what I'm doing. I happen to be of the opinion that the way we use aid spending under the MoD budget to artificially inflate it up to the required NATO level is rather cheeky, and believe that we could do many great things with a little more cash in the defence kitty.

This is merely about playing devils advocate. We cannot allow our own preferences in this particular moment to blind us to other arguments and other concepts that may prove of sound use in the future. Perhaps if political parties were less idealistic and dogmatic in their approach to government and more flexible to alternatives that better fit the times then we wouldn't have some of the problems that we do in this country.

Back to the defence sector then and through the lens of Bastiat's approach we begin to question the validity of spending money on defence in the name of preserving jobs and skills.

I always frown a little for example when people say that we will lose skill xyz if we allow such and such shipyard to close, or such and such aircraft factory to shut down. I don't want to see such facilities close, but the argument that skilled workers will be lost to the economy forever is somewhat tenuous.

Consider this; the people who work in the defence sector do so because they possess certain complex skills, knowledge and traits that are in demand. They are not simply casual labourers, lifting items from one place to another. They have very specific, valuable skills. Skills that could be applied elsewhere.

The field of aeronautics for example goes far beyond just things that fly, like the recent boom in wind turbine design and manufacture for example. Welders have use outside of just welding warships together. Nuclear engineers can work on designs for civilian power generation.

A man or woman employed to design the sleek form of a new fighter jet could potentially otherwise be designing a break through new design for a fuel efficient car. The person employed on creating a new warship radar could potentially be turning their talents to some other electronic endeavour, one that might create an unprecedented break through in communications or computing for example.

In terms of government finances we also have to consider the maximum use of each penny. We often believe that by spending at home we will secure our manufacturing base for the future. What if we could purchase equipment cheaper abroad though? The difference saved could be spent on other projects, while freeing domestic scientists and experts to work on other programs and industries that could be more bountiful in terms of exports?

It's an angle that has to be considered first before we dive head long into some of the well meaning arguments about supporting British defence manufacturing. Money given to BAE or Lockheed Martin UK does not just appear out of nowhere. It has to come from somebody or something.

If you leave the national budget untouched then some other department must bear the burden in order to increase defence spending. If you opt to increase the national budget in order to accommodate new spending then you either have to tax the people more heavily, resulting in losses to local economies, or you have to borrow more money from the markets... money that has to be repaid through future taxation.

Money spent to boost employment in defence is money not being spent to boost employment in health, or transport, or the energy sector. Unless there is a sound (or relatively so) benefit or need for additional defence spending, then spending on defence for defences sake becomes an unproductive waste of valuable national resources that could be turned to other uses that would serve to enrich our nation (figuratively and/or literally) to a greater extent.

I think this is worth keeping in mind as we debate back and forth. Those of us who blog, tweet, read and comment about defence naturally have a slight bias in favour of greater defence spending, but before we commit unwaveringly to extra funds for new submarines, frigates, fighters and tanks, we should always be mindful about asking ourselves whether we really need all the things that we covet, and what is the hidden cost - That Which Is Not Seen - to the nation?