Dominic Lawson: A lesson from the Napoleonic Wars

Bastiat argued that when public expenditure is cut, the immediate consequence is highly visible; but the effect of that money being returned to taxpayers is not seen

There is a phrase never far from the lips of the Government's critics, one that has assumed a peculiar potency: it is that the coalition's plans to reduce our national debt "will take money out of the economy".

By this the critics say they are referring to the cuts in public expenditure outlined by George Osborne in his Budget last week – which are indeed eye-watering. Yet the alternative to such cuts would only be more tax rises: why could not that also be described as "taking money out of the economy"?

The truth is that it is debt that needs to be taken out of the economy – on a scale not contemplated since the Attlee administration fought to pay down the massive borrowings incurred in fighting the Second World War. Today the Labour party pretends that it is sustainable to borrow one in every four pounds of public expenditure – a position that it would have to reverse if it were still in Government.

It has, historically, been military adventures that have led governments into financial crises – and it is worth turning to an earlier such example in order to see the oddity of the argument that public expenditure cuts "take money out of the economy".

In the wake of the Napoleonic wars, the French were stuck, as it seemed, with a very large body of men in uniform, trained for fighting and not much else. Yet when a member of the national assembly, Frederic Bastiat, argued that the state should no longer finance an army of this scale, he was not popular.

Later, Bastiat addressed his critics in a remarkable essay entitled "What is seen and what is not seen". His basic argument was that when public expenditure is cut, the immediate consequence is highly visible – in that case, the redundancy of soldiers – but the effect of that money being returned to taxpayers, and the men made available for more profitable purposes than parading, is "not seen".

To illustrate this, Bastiat quotes from a typical speech of one of his opponents "Discharge a hundred thousand men! What are you thinking of? What will become of them? What will they live on? On their earnings? But do you not know that there is unemployment everywhere? ... Just at the moment when it is difficult to earn a meagre living, is it not fortunate that the state is giving bread to a hundred thousand individuals? Consider further that the army consumes wine, clothes, and weapons and thus spreads business to the factories and the garrison towns, and that it is nothing less than a godsend to its innumerable suppliers. Do you not tremble at the idea of bringing this immense industrial activity to an end?"

You can see from this that the theories we now know as Keynesianism were advocated avant la lettre in the French National Assembly of the first half of the 19th century. Bastiat repelled them as follows: "A hundred thousand men, costing the taxpayers a hundred million francs, live as well and provide as good a living for their suppliers as a hundred million francs will allow. That is what is seen. But a hundred million francs, coming from the pockets of the taxpayers, ceases to provide a living for these taxpayers and their suppliers, to the extent of a hundred millions francs. That is what is not seen... You do not see that, before, the country gives the hundred million francs to the hundred thousand [soldiers] for doing nothing; afterwards it gives them the money for working... If all things considered, there is a national profit in increasing the size of the army, why not call the whole male population of the country to the colours?"

Bastiat was, in fact, advancing the same argument that George Osborne and his colleagues are putting forward the best part of two centuries later: that public spending is a substitute for private spending, which adds nothing to overall levels of employment, and can have the perverse effect of directing people into occupations and enterprises for which there is political, rather than popular, demand.

George Osborne however, chose not to be as brutally direct to Parliament last week as Bastiat was to the French assembly: "As a temporary measure in a time of crisis, this intervention on the part of the taxpayer could have good effects... As a permanent, general, systematic measure, it is nothing but a ruinous hoax... which makes a great show of the little work that it has stimulated, which is what is seen, and conceals the much larger amount of work that it has precluded, which is what is not seen."

Naturally, those in the Britain of 2010 who believe that Gordon Brown's doubling of the cost of the state to the individual represents a good deal for all tend to be those whose wages and index-linked final salary pensions are paid for out of general taxation, rather than voluntarily, by the consumer and business. They would be right to argue that many of those so paid are doing work genuinely welcomed by the population, and much more socially useful than the engorged French standing army of Bastiat's day. Yet the engorgement of the "modern" public sector, complete with unproductive jobs of merely political significance, dwarfs anything that Bastiat could have contemplated.

For example, I was told last week by a very senior police officer that his force spends as much of its time (and the public's money) "auditing" crime, as it does in detection – the job the public rightly thinks is the police's proper function. By "auditing", he essentially meant pure bureaucracy – complying with Government edicts and targets – quite detached from the business of keeping the public safe. This is a point worth bearing in mind if the police begin to complain that any cut in their number will inevitably lead to more crime going undetected.

The opponents of Bastiat's attack on the bloated French military protested not just that the nation's safety would be put at risk, but that those released would be unable to find other work: the same argument might be used in the months to come in response to any cut in our police budgets. Yet can it really be true that those who have entered public service are so inadequate or untalented that they would be unable to find employment by anyone other than a beneficent and indulgent state? Such an argument would surely be doing our public servants a deep injustice.

In this context it is worth recalling that the British economy is not, actually, in recession. It is growing, albeit slowly. Moreover the global economy, in absolute contrast to the 1930s – which Labour keeps citing as analogous to our present predicament – is expanding at an annual rate of about 4 per cent. We are not in the "Keynesian moment" of a world-wide slump and a massive contraction of export markets; and, by the way, Maynard Keynes himself believed that public debt should never be much higher than 25 per cent of Gross Domestic Product, making George Osborne's targets look rather expansive by comparison.

This is not to deny that the next few years will be painful, acutely so for those who have long been dependent on the taxpayers' enforced largesse; but even Alistair Darling, when Chancellor, warned that a re-elected Labour government would have to make public expenditure cuts "much tougher and deeper than Thatcher's". Believe it or not, it's for the best. The alternative, as Frederic Bastiat pointed out all those years ago, is "a ruinous hoax".

d.lawson@independent.co.uk