Two dead economists. (Forward Observer).(theories of Frederic Bastiat and John Maynard Keynes )

As I write, the U.S. economy has grown 3 percent over the past 12 months (average for the post-World War II period), unemployment is 5.7 percent (also average), and inflation is 1.5 percent (well below average). Those are pretty good numbers. Yet something is clearly wrong. There's no oomph to the economy. Businesses aren't investing in new machines, plants, and technology; consumers and investors are listless. What's going on? Two dead economists can provide some insight.

The first is Frederic Bastiat (1801-1850), whose big idea was this: "In the economic sphere, an act, a habit, an institution, a law produces not only one effect, but a series of effects." Usually, one effect is seen, the others are unseen.

Bastiat's famous example involved a broken window: a kid breaks his father's window. Dad pays a glazier six francs to repair it. The glazier gets six francs in income. Thus, more economic activity! Not so fast. That's the "seen" part. The "unseen" part is that Dad would have used the six francs to buy new shoes, so the shoemaker is deprived of the money. We can call it a wash. But it's worse. If the accident hadn't happened, the Dad "would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window." The "unseen" can be important too.

Now, consider the corporate scandals that broke about a year ago, and the legislative remedies that were enacted last summer. What's "seen" is a new corporate-accounting oversight board, new criminal penalties for misleading investors, and various changes in securities law that are all meant to increase the confidence of investors. What's "unseen" is the effects these reforms have had on corporations: first, the extra costs of complying with the new rules and, second, a more profound unseen effect, for which we need to turn to the second dead economist.

He is John Maynard Keynes (1883-1946), probably the most influential policy intellectual of the twentieth century. Lord Keynes got many things wrong, but one of the things he got right was the intriguing concept of "animal spirits." He wrote:

 
   Most ... of our decisions to do something positive, the full consequences 
   of which will be drawn out over many days to come, can only be taken as the 
   result of animal spirits--a ...