In 1850 an economist and philosopher that was soon to meet his demise wrote a pivotal essay entitled “That Which Is Seen, and That Which Is Not Seen”.  He was a Frenchmen, but don’t hold that against him. His name was Frederic Bastiat, and he was (and still is) a great voice of wisdom in the quest for liberty. This essay was my first introduction to his writings, and I ate up his every word like they were – as Daffy Duck might say – French ‘Fwise’.

Beyond What Is Seen

Every cause has an effect. “Thank you, Mr. Obvious”, you might be thinking. But don’t forget that every effect subsequently becomes a cause to a series of effects. Cause and effect isn’t a one-stop shop. While its easy to see the immediate cause of an action, going further is much more difficult. Here’s how Bastiat puts it:

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen: it is well for us if they are foreseen.

Drawing out the implications, Bastiat continues:

Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.

Bad economists accept simplistic explanations for their policy decisions. They accept the immediate cause as sufficient, often leaving subsequent causes out of the equation. Good economists, on the other hand, realize good immediate causes may not lead to good subsequent causes. In fact, they often don’t.

Broken Windows, Broken Economics

Perhaps the best illustration Bastiat uses to illustrate his point is that of a broken window. Suppose an accident takes place and a shop’s perfectly good, in-working-order window is broken. The owner of the shop now needs to hire someone to replace the window. This creates a job, and jobs are good for economic growth. This sequence leads some economists to the following conclusion: the broken window was good for economic growth. This would be, in the words of Bastiat, the ‘bad’ economist’s way of thinking. On the surface, it is taking into effect that which is seen. Underneath the surface lurks that which is not seen.

And what is not seen? Bastiat responds:

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.

Now this may seem rather evident once laid out – to the point where you begin thinking no rational person could believe the opposite. You might think that way until you read certain Nobel Prize winners from certain well-circulated newspapers, and certain “senior economists” from certain well-known investment banks – who believe just such nonsense. Then you begin to realize that there are a lot of bad economists out there in high places.

Why It Matters

It’s not just the NY Times and CNN, these types of economic “experts” are everywhere. Recently, many economists have been reasoning this way regarding the Federal Reserve’s (Fed) decision on interest rates. They believe a 0.25% rise in the rate on excess reserves actually matters. They reason thus because lower interest rates encourage more spending, which helps the economy. In addition, the lowering of the interest rates have been conducive to the latest rise in the stock market. Easy money means more stock buying, which means higher stock prices. They are thinking in terms of the direct impact; in terms of what is seen.

Although simplistically satisfying, this explanation is nonsense. The Fed cut rates dramatically during both the credit crisis (’08-’09) and the Tech Bubble (’00-’02), when stocks lost 40-50% of their value. From the perspective of history, the media “experts” have it all wrong. However, what is more significant than what they don’t know is what they don’t see. Artificially low interest rates have already led to the creation of that which is as of yet unseen – the third financial bubble in the last 16 years.

This is very significant if you have chosen to delegate your portfolio’s investment management. Does your advisor understand that which is unseen? Or is he focusing on that which is seen? Remember, this is the whole of the difference when evaluating the good from the bad. Bastiat sums it up nicely:

Hence it follows that the bad [advisor] pursues a small present good, which will be followed by a great evil to come, while the true [advisor] pursues a great good to come, at the risk of a small present evil.


Here at Plan Financial, we say it all the time: successful investing is painful. It’s painful because it requires that we accept the risk of a small present evil (i.e. lower returns in the short term) for the greater good (i.e. our client’s success).

Bad advisors – like bad economists – consider only the immediate impact of their investment decisions. They sometimes trade frequently in order to chase those fleeting returns they will never achieve. Or, as is sometimes the case, they trade too infrequently. They look for a bounce back from investments they had no business buying in the first place. In either case, focusing on that which is seen means they miss the that which is unseen. And by missing the unseen, what remains unseen is the value they add to their clients.

Here at Plan Financial we look forward, working to foresee the cause and effect chain and working towards that which becomes seen: our client’s success.

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