Saturday, October 6, 2012

The Wisdom of Étienne Bonnot, Abbé de Condillac

Étienne Bonnot, Abbé de Condillac (1714-1780)
As I mentioned in my past writing, I am right now reading French philosopher Étienne Bonnot, Abbé de Condillac's monumental work, Commerce and Government considered in their Mutual Relationship. Condillac originally published this book in 1776, just few months before Adam Smith's Wealth of Nations. Today the book is published by the Liberty fund and is available in both paper and hardback. As I am reading one chapter after another, I am astonished by Condillac's brilliant wisdom and his deep understanding of human nature. The original reviewers and translators, Shelagh and Walter Eltis rightly said that, the case for competitive market economics has rarely been presented more powerfully, and that there is continuing relevance in Condillac’s account of the difficulties that those who seek to liberalise economies still encounter. In the following paragraphs I want to briefly present some of the major ideas of Condillac and its relevance with the present day circumstances, especially the dismal status of mainstream economics.

Abbe de Condillac was a renowned 18th century french philosopher who worked mainly as a director of studies - tutor - to the prince of Parma. After finishing his duties as a tutor, Condillac decided to write Commerce and Government because he felt the need of instructing the prince about the economic matters, especially about what the king needs to do to govern his country's economy well. And the advise that Condillac gave to the prince is so precious and relevant for today's psychopathic central planners that it is worth reproducing here. Condillac said,

 Governing an economy requires a comprehensive genius who knows everything, who weighs everything, and who directs all the resources of government in perfect harmony. It would be difficult, or rather impossible to find such a genius. The best intentioned and most skilful statesmen have made mistakes through ignorance or through over hasty action, for it is difficult to see all and bring all together without sometimes falling into error. . . statesmen never do more harm than when they wish to interfere in everything. It is wisest to confine oneself to preventing abuses and otherwise to pursue a policy of laissez-faire. (Condillac, Cours d’études, 20:488) (Liberty Fund ed., p. 35)

There you are! In just one paragraph Condillac exploded the myth of a omniscient benevolent central planner(s). He recognized the fact that, even central planners are normal human beings like you and me, and if we can mistake - as central planners frequently allege to justify their intervention in the economy - then they are also prone to those same mistakes; they are also as fallible as any normal human being is. People like Manmohan Singh, Raghuram Rajan or Montek Ahluwalia are not angels that they know everything about how to run an economy. Economy is very complex and it can't be centrally run. Later on, in the 20th century, the Austrian economist F A. Hayek also made similar arguments regarding the 'knowledge problem' of the central planners. Ludwig von Mises's challenge of impossibility of socialistic calculation is the ultimate proof that centrally planned economies can never flourish than otherwise they would've in the absence of this central planning. Condillac thus advised the prince to pursue the sound economic policy of Laissez Faire i.e., Free Market Capitalism. Mises and Hayek both also advocated for the same policy for today and tomorrow.

Today's mainstream economists justify the existence of a central bank like RBI for the purpose of "price stability" e.g., RBI's one of the stated objectives is: maintaining price stability and ensuring adequate flow of credit to productive sectors. Indian government also fixes prices of myriad of economic goods for winning political votes. Condillac demolished this fallacy of "price stability" some 300 years ago, and warned against the danger of any government "price fixing". After explaining what determines the market prices i.e., exchange rations between various goods that are trading, Condillac said,

So prices will vary from market to market.

Doubtless it would be an advantage for the tribe if produce always had a determined and fixed price: because exchanges could be made without discussion, promptly and without loss. But that is not possible, because there cannot always be the same proportion between the foodstuffs, whether one considers them in the warehouses where the owners store them or in the markets to which they are carried.

If the variations are slight, they will hardly be felt. In that case they will have no disadvantages, or they would produce such small ones that it would be pointless to prevent them. It might even be impossible to anticipate them, and dangerous to try. Besides, we shall see that government deals a blow to agriculture and to commerce each time it tries to fix the price of foodstuffs. (bold mine)

As Condillac said, RBI's "price stability" is a chimerical policy. In a dynamic human economies, fix price of anything is simply impossible because the myriad of factors affecting price are constantly changing. Actually, under the guise of this propagandist "price stability" policy, RBI is creating inflation since its inception, which is resulting in a relentless rise in the prices of various economic goods! Inflation is government and banker's means of stealing common man's wealth. Condillac also mentioned the disastrous effects that government's price fixing policies will bring about. We witness these disastrous effects everyday today where government price fixing creates unemployment in the labor market, scarcity of good furnished cheap homes because of rent control laws or rapid depletion of petrol reserves because of consumption boom at the artificially suppressed subsidized price of petrol etc., etc. Condillac thus advised against any government or central bank RBI's price fixing policies. He again emphasized the importance of a free market by saying,

One sees therefore that in general prices will regulate themselves according to the respective quantities of the goods on offer for exchange.

You can see too that prices can only regulate themselves in markets, because it is only there that the assembled citizens can, by comparing the interest they have in making exchanges, judge the worth of things in relation to their needs. They can only do it there, because it is only in markets that all the goods to be exchanged are in evidence: it is only in markets that one can judge the relative abundance or scarcity of one against another; the relationship which determines their respective prices.

That is how prices constantly adjust, in the case where everyone has, as I said, freedom to bring to the market what he pleases, and in the quantity he chooses. We shall deal elsewhere with the disadvantages which will arise from a lack of freedom. (bold mine)

Another economic fallacy of our time is people considering "money" as a source of wealth. Mainstream Keynesian economists and their major employer central bankers are telling us that, if we can print a bit more money - over and above the already gargantuan amount of money that they have printed - then the economy will get out of recession and we all will be wealthy after that! Even an average man keeps on running after "money" thinking that, it is the true source of wealth. Condillac battled hard to expose this age old mercantalist fallacy even in his time. In his 6th Chapter, he said,

Wealth consists in an abundance of things which have a value, or, which comes to the same, in an abundance of things that are useful because we need them, or finally, which is again the same, in an abundance of things which are used for our food, for our clothing, for our housing, for our comforts, for our pleasures, for our enjoyment, in a word for our use.

As Richard Cantillon before him, Condillac was well aware of this eternal truth that, wealth consist in the abundant production of economic goods which are meant for our use i.e., things which are used for food (apple, orange, wheat etc.), for clothing (jeans, t-shirt, dress, suit etc.), for housing (flat, bungalow, villa etc.), for pleasure (books, paintings, music etc.) , for enjoyment (TV, video player, garden, amusement park etc.) etc. As Richard Cantillon said, money printing will only result in higher prices of various economic goods present in the economy. It can only transfer wealth from the productive class of economy to the unproductive class. Condillac also proved that, it is  impossible to create something out of nothing!

People, especially socialist and communists, speak a lot about equality. "Equity" is one of the major goals of Indian government's economic and social policies. Here is Condillac on this so-called goal of "equality",

Now, when everything is in order, all work is useful. It is true that these labours divide up wealth unequally but that is fair since they require talents that are scarcer or more common. So no one has cause to complain and everyone stays in his place. To keep the citizens in perfect equality you would have to forbid any division, ignore talent, put all their property in common, and condemn them for the most part to live in idleness. (bold mine)

And that is exactly what happened in communist soviet union and is happening in all other socialist countries including India. The goal of "equality" is in stark opposition to the reality of variety of human beings. There is nothing "equal" out there in the world, and any attempt to make things forcefully equal will result in idleness of resources and final economic ruin.

Condillac's monetary views are brilliant. Ludwig von Mises, in his monumental work The Theory of Money and Credit gave the logical proof - his money regression theorem - of why precious metals (or for that matter, any commodity which has value in the market before it assumes the role of money), which were initially used as just another merchandise in the market, can only become the common medium of exchange. This theorem of Mises exposes the fallacy of 'money is what the government says it is" kind of arguments. Money can only organically evolve in the free market, and no State can bring it into existence ex nihilo. Condillac also wrote something very similar almost 300 years ago. He said,

From all that has been said, we must conclude that metals are only merchandise because we make varied use of them, hunt them out through curiosity, and use them for ornament. Now it is because they are a commodity that they have become money. Let us see the transformation they have made in commerce. (bold mine)

This implies, that today's fiat paper currencies are not money. They are just that, currencies, which are not defined in terms of underlying unit weight of precious metal Gold or Silver. Rupee originally was a coin of Silver, but now it is just a useless piece of paper. People are forced to use it as a common medium of exchange only via government coercion in the form of legal tender laws. This government fiat paper currency has created disasters in our economies in the form of inflation, business cycles, wealth transfers, and regime uncertainty, which is hindering the smooth operation of commerce in the absence of stable monetary standard.

Condillac also demolished the wrong notion of money as an absolute measure of value of other things. Present day mainstream economists use money as such a measure of value, and based on this fallacious notion, they do all kinds of blunders like measuring inflation via price indexes (WPI, CPI etc.), measuring GDP by using market prices etc. As Condillac said, money is not an absolute measure of value of other goods which are exchanging against it. It only represents one side of the transaction, and just like other goods, money also has its own value, which keeps on fluctuating. He said,

We have noticed that, in exchanges, goods are reciprocally the price of each other. We shall note here that if money is the measure of the value of the goods one buys, the value of the goods one buys is reciprocally the measure of the value of money. For example, to suppose that with six ounces of silver one can buy a muid of corn, is that not to suppose that a muid of corn is the measure of the value of six ounces of silver?

So when money has been taken as the common measure of all value, it is solely, as we have seen, because of all tradable goods it is the most suitable for this purpose; and that does not infer that it cannot itself have, as a measure, the value of the goods against which it is exchanged. On the contrary, it is clear that the value of what one buys is always the measure of the value of the money one gives.

But once people have taken money as a common measure, they soon come to see it as an absolute measure: that is to say, as a measure that is a measure by itself, independently of any connection, or as a good which, by its nature, measures all others, and is not measured by any of them. This misapprehension could not fail to spread much confusion. It has also made us see an equal value in the goods we exchange, and we have made a principle of commerce out of this equal value.

I think this profound insight is beyond the comprehension of today's mathematical economists who are busy churning historical data in their useless dynamic stochastic general equilibrium models!

In his chapter of the circulation of money Condillac bulldozed today's prevalent idea that by printing and creating money out of thin air we can increase consumption or bring an economy out of recession. He exploded the notion, that increasing commerce requires increasing supply of money. Here is Condillac:

That money does not circulate at all at present. But it is not very important whether there is more or less in circulation; the main point is that it should circulate freely.

We have seen that money is only a measure of value because it possesses value itself; that if it is scarce, it has greater value; and that it has a smaller value if it is plentiful.
If there is twice the amount of money in commerce, we will give for a good two ounces of this metal instead of one; and if there is half the quantity of money, we will only give half an ounce instead of a whole ounce. In the first case, an owner who would put out his land to farm for fifty ounces, would let it for a hundred; and in the second he would let it for twenty-five. But with a hundred ounces he will only do what he did with fifty; just as with fifty he will only do what he did with twenty-five. So he would be deceiving himself if he thought himself richer in one of these cases than in the other. His income is always the same, whether the coin is smaller or greater. Whether one counts it at a hundred ounces, or fifty, or twenty-five, nothing is changed; since with these various ways of counting, one can only ever make the same consumption. (bold mine)

You can see that by printing more money, total consumption in the economy is not going to increase. This money printing is not going to make the country richer. And commerce will work smoothly with whatever supply of money that is available in the economy at a given point of time.

His chapter on Monopoly is an absolute devastation of many peoples' fear that in the absence of the State, one giant corporation will create monopoly and take over the whole world. Condillac's treatment of monopoly is in many ways a mirror image of Murray Rothbard's treatment of this same subject in his epic work, Man, Economy and State. Condillac logically proves that in a free market, no private monopoly can arise, and the main source of monopoly actually is the State! Here is Condillac:

To be the sole seller is to create a monopoly. This word which has become odious should not always be. A great painter may sell his works alone, because he alone can create them. He takes his wage to the highest point: it has no other regulation than the wealth of the admirers who are interested in his paintings.

Do you dream of being painted by him, because he makes perfect likenesses, and always in fine style? He will ask a hundred louis for a portrait, or even more, if at this price people request more than he can paint. His interest is to earn plenty, while making few portraits; to make few, so as to make them better, and that way to secure his reputation all the more.

This price may appear exorbitant. However, it is not: it is the true price. It is ruled by an agreement made freely between the painter and the sitter, and no one is hurt. Are you not rich enough to pay a hundred louis for your portrait? Do not have it made, you can do without it. Are you rich enough? It is for you to see whether you prefer to keep your hundred louis or to exchange them for your portrait.... 

.....Now sellers will multiply of their own accord when no obstacles are placed in the way. As every type of trade offers a profit, it is not to be feared that this will not happen. If one leaves it free to happen, it will happen, and the number of merchants will grow, so long as carrying on the trade concurrently, they find enough profit to subsist. If they were to multiply too much, as must sometimes happen, a portion will abandon a trade which is not profitable to them, and exactly the right number of merchants will remain. Once more one must not interfere: if there are monopolists, freedom will purge society of them.

As Condillac said, no one is hurt if one is voluntarily buying even from a monopolist. The whole scare of 'private monopoly' is just one excuse of staists to create their own "government monopoly". And as he said, in a free market economy, one person can never create a monopoly because he can't stop others from entering in his industry. He also pointed out that, the real source of monopoly is the government itself. He wrote:

Nowadays all the commerce in Europe is therefore carried on by monopolists. I do not wish to speak of the customs, tolls and exclusive privileges which impede internal trade from province to province: we shall deal with these abuses elsewhere. I am only referring to the obstacles placed in the way of commerce between nation and nation. (bold mine)

Today many people also allege, that in a free society rich people will exploit poor people. Condillac exploded this myth too by noting that free market system creates order in the society. He expounded the basic arguments of Mises's Law of Association. In a free society everyone is in a need of everybody else, but yet everyone is independent. Condillac said,

Such is in general the nature of men: the person on whom one depends wants to draw advantage from his position; and all would be despots if they could. But when, in different respects, dependence is mutual, all are forced to give way to each other, and no one can abuse the need one has of him. So interests come together: they merge: and although all men seem dependent, they are all in fact independent. There you have order: it is born from the respective and combined interests of all the citizens.

Finally, Condillac gave his precious advise for making a country richer. He said,

We may conclude that if the states of Europe persist in denying complete freedom to trade, they will never be as rich or as populous as they might be; that if one of them gave complete and permanent liberty, while the others only allowed a temporary and restrained freedom, it would be, other things being equal, the richest of all; and that finally, if all ceased to place obstacles in the way of commerce, they would all be as rich as they could be; and then their respective wealth would depend, as we have already noted, on the fertility of the soil and the hard work of its inhabitants.

So, here you have all the basic things you need to know about making India and the Indians richer. As long as the Indian government is having its stranglehold on the free market, India cannot become rich. As long as Indian people are not having total freedom, this country can not grow rich.

I am now reading the second part of Commerce and Government, which I will discuss in future writings.

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