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But isn’t something missing from this account?
Indeed, there is: the subjectivist Austrian insight that individuals gain from trade per se. For an exchange to take place, the two parties must assess the items traded differently, with each party preferring what he is to receive to what he is to give up. If that condition did not hold, no exchange would occur. There must be what Murray Rothbard called a double inequality of value. It’s in the logic of human action–which Ludwig von Mises christened praxeology. Bastiat, like his classical forebears Smith and Ricardo, erroneously believed (at least explicitly) that people trade equal values and that something is wrong when unequal values are exchanged.
Perhaps I am too hard on Bastiat. After all, he was writing before 1850. Carl Menger did not publish Principles of Economics until 1871. Yet the Austrians were not the first to look at exchange strictly through subjectivist spectacles, that is, from the economic actors’ points of view. The French philosopher Étienne Bonnot de Condillac (1715-1780) did so a hundred years before Bastiat wrote:
The very fact that an exchange takes place is proof that there must necessarily be profit in it for both the contracting parties; otherwise it would not be made. Hence, every exchange represents two gains for humanity.
Well, perhaps Bastiat was unaware of Condillac’s argument. That is not the case. He reprints the quote above in his book and responds:
The explanation we owe to Condillac seems to me entirely insufficient and empirical, or rather it fails to explain anything at all. . . .
The exchange represents two gains, you say. The question is: Why and how? It results from the very fact that it takes place. But why does it take place? What motives have induced the two men to make it take place? Does the exchange have in it a mysterious virtue, inherently beneficial and incapable of explanation?
We see how exchange . . . adds to our satisfactions. . . . [T]here is no trace of . . . the double and empirical profit alleged by Condillac.
This is perplexing. Clearly, the necessary double inequality of value is not empirical or contingent. Contra Bastiat, the double inequality explains quite a lot, and his questions all have easy answers.
Yet more perplexing still is Bastiat’s statement in the same chapter: “The profit of the one is the profit of the other.” This seems to imply what he just denied.
Bastiat’s failure to grasp this point had consequences for his debates with other economists. For example, he and his fellow “left-free-market” advocate Pierre-Joseph Proudhon engaged in a lengthy debate over whether interest on loans would exist in the free market or whether it was a privilege bestowed when government suppresses competition. Unfortunately, the debate suffers because neither Bastiat nor Proudhon fully and explicitly grasped the Condillac/Austrian point about the double inequality of value. As Roderick Long explains in his priceless commentary on the exchange,
[E]ach one trips up his defense of his own position through an inconsistent grasp of the Austrian principle of the “double inequality of value”; Proudhon embraces it, but fails to apply it consistently, while Bastiat implicitly relies on it, but explicitly rejects it. . . .