- Liberty Is the Theme of the American Spirit - July 7, 2020
- Ad Hominems Against Freedom - July 2, 2020
- Fifty Years of Statist Policies and Economic Fallacies - June 24, 2020
Momentous events usually leave strong memories on those who have lived through them, and those memories often become passed on to later generations in the form of historical interpretations of why and what had happened in the past. This has certainly been so in the cases of the Great Depression, the Second World War, the Civil Rights Movement, the Vietnam War, the terrorist attack of September 11, 2001, the financial crisis of 2008-2009, and now, no doubt, in the face of the Coronavirus pandemic of 2020.
One very important aspect to many of the interpretations of these past events is the lessons drawn in terms of the role of government in the free society. The dust is very far from settling in this latest health crisis that is, truly, enveloping the world. But even in the urgency of finding and implementing ways of minimizing the impact on human life and well-being from the Coronavirus, the outlines of how this crisis may be interpreted in the future is already showing its outline in the present.
Wrong Lessons That May Be Learned from the Coronavirus Crisis
One lesson that will, no doubt, be claimed is that this has once again demonstrated the limits of free markets and the need for activist and centralized governmental oversight, control and command. Dealing with a health issue like the Coronavirus cannot be left up to the decisions or discretion of individuals or even local governments. There has to be designed and directed health-management through central planning by government “experts” and agencies in this type of crisis, it will be said.
As part of this lesson will be the additional claim, as happened in many previous national disasters, of the need to prevent the greed of those in the private sector who try to take personal advantage of a human disaster by “price gouging” and grasping at unwarranted profits at their neighbor’s expense. Price controls in the form of price ceilings and possibly government-organized rationing of essential goods in short supply must be placed outside the everyday arena of ordinary market supply and demand, it will be insisted.
A second lesson that will be suggested by some will be the “dangers” and undesirability of international interdependency for many of the goods and services needed by communities and countries, the supplies of which can become limited or completely lost during a world health crisis such as the Coronavirus due to the supply chains of production that criss-cross national boundaries under the current global system of division of labor.
Better that some essential and vital resource supplies and manufacturing of such goods be “homespun;” that is, produced and supplied domestically in the name of the “national interest.” Some conservatives who have long been wary of “American” industries and employments being “lost” to producers and workers abroad are already saying that the current health crisis shows the need for greater economic self-sufficient “independence.”
And, third, voices are being heard along a wide range of the political and ideological spectrum for the need and necessity for “activist” fiscal and monetary policies to temper and stabilize the negative financial, production, and employment recession-like effects that the Coronavirus is spreading around the world. Markets cannot be left on their own without even more dire consequences for societies beyond the tragic physical hardships and losses to human life from the pandemic.
It is said that even lower interest rates and greater amounts of money and credit are needed to bolster investment and production, while fiscal “ease” in the form of government spending and general or targeted tax breaks are essential to keep small, medium and too-big-to-fail larger businesses afloat. Investment stimulus and aggregate demand-management are once again shown to be the tried and true Keynesian spending cures to the economic ills of society, by the macroeconomic policy managers.
Government Failures in China and America in Fighting the Virus
Given these likely and emerging interpretations of the Coronavirus pandemic, it is, first of all, important to appreciate that delays in effective communication about the existence and potential dangers from the virus, and then the failure of more widely spread testing in the United States are, in fact, failures not of a free marketplace but of government central planning and control.
The press has been full of stories of how early indications about the virus and its potential dangers were suppressed by the Chinese communist government. The reality of this went “viral” even on China’s highly censored and controlled social media platforms when news got out that one of the physicians attempting to inform and publicize what was being discovered was ordered by the Chinese government to keep quiet, and then ended up dying from the Coronavirus himself.
And in typical political form, the Chinese government has attempted to shield President Xi Jinping from any criticism of being responsible for policies that delayed an earlier response by making up factitious stories about how President Xi was “ahead of the curve,” guiding and directing the nationwide lockdown and medical commands that have “saved” the country. And that it was really all due to the U.S. military whose personnel visiting the epicenter city of Wuhan brought the virus to China to keep that proud nation “in its place,” in a world of American “hegemony.”
The media in America, including “The New York Times,” have chronicled how America’s own health care central planning system prevented many of the more early responses to the virus due to the rigid top-down rules and procedures imposed by the Pure Food and Drug Administration (FDA) and the Centers for Disease Control (CDC) in hamstringing local and decentralized development and use of Coronavirus testing tools, since nothing could be done without approval and permission of the American government’s health and drug planners.
Furthermore, when some “rogue” healthcare providers around the country attempted to disobey the health care overseers and social engineers by utilizing their own testing methods and equipment to determine who and to what extent the virus may have spread in their area of the U.S., they were told to cease and desist, and wait for whatever and whenever the testing devices were made available to them by and according to the standards of the federal regulators. (See, Adam Thierer’s article, “How the US Botched Coronavirus Testing”.)
However, rather than questioning the centralized process of permitting the development and use of methods for disease testing, the lesson to be learned, it is presumed, is that the government merely needs to introduce more “flexible” rules and procedures to better team up with state and local health and medical treatment agencies to deal with the current and future crises of this type.
Government Regulation vs. Market Discovery
The idea that virtually all such matters might better be left up to the private, competitive marketplace seems to not even be considered in the arena of debate. Potential “market failures” are seen everywhere, and possible “government failures” are brushed aside as incidental errors and omissions on the pathway to better political oversight of the health and medicine.
But as Austrian economist Friedrich A. Hayek (1899-1992) argued more than half a century ago, “Competition is a Discovery Procedure” (1969) through which individuals and enterprises have the opportunity and the incentives to not only discover the new and better and improved, but to find out what might be possible. Not only can we not know until a competitive process has been allowed to play out who may be the “winner,” but it is only in an arena of competition that individuals have the motive and ability to find out what they are capable of; something that they, themselves, cannot fully know the answer to until they are at liberty to try and have a reason to want to.
The hoops and hurdles that pharmaceutical companies and other manufacturers of medical and health related products must make their way through under the rules, procedures and permissions of federal agencies such as the FDA and the CDC only succeed in reducing the incentives, raising the costs, and narrowing the field of those who otherwise might be willing and able to undertake research, experimentation and marketing of those medicines and medical-related products that could save or improve lives.
A common and reasonable response is, of course, but what about standards and experimental procedures to assure consumer safety from poorly tested and hastily marketed health-related products in the pursuit of profit? Is that not the reasonable rationale for government to centrally approve and oversee regulatory methods over all such marketed products?
The Incentives of Self-Regulating Markets
The word “regulate” is defined by Webster’s dictionary as meaning “to govern or direct according to rule,” or “to bring order, method, or uniformity to . . .” The Oxford Dictionary says to, “control (something, especially a business activity) by means of rules and regulations.” Understood in this way, there is little if anything that any of us do that is not according to “regulation,” both as individuals and in association with others, even without government.
We each have our time schedules and procedures that we follow in various ways and to varying detail. Even when what a person does does not seem to make much sense, do we not sometimes say such things as, just look beneath the surface and you’ll “discover the method to the madness?” Private sector clubs, associations, business enterprises and arenas of market interaction all have their own participant-generated regulations to facilitate and coordinate how and for what the participants interact with each other for smoother and more predictable pathways to mutual success; and to reinforce confidence on the part of any participant about how his interlocutor has acted and what procedures they may have followed leading up to the transaction and trade.
Many of those rules and procedures that “regularize” how people do things, for whatever purposes, and with whatever degree of surety of reliability and confidence in the conduct of those with whom we buy and sell have, historically, emerged before the modern era of government regulation, and often continues parallel to or independently of any such regulatory rules and procedure imposed by government.
No pharmaceutical or medical equipment company concerned with its long-term viability as a profit-making enterprise can count on staying the course in the marketplace by killing their customers, adulterating their products, or making intentional false promises or guarantees. Hollywood movies may make their millions by portraying every drug company as a murderous monster in its pursuit of more profitable market shares, but that is not how real, market-based companies can afford to operate. Possible lawsuits, sky-high insurance premiums and the loss of brand-name reputation always dog any company thinking of cutting corners to any extent. (See my review of “Regulation Without the State”.)
Regulations Serving Vested Interests
Economists have long emphasized what is sometimes called the “capture” theory of government regulation. That is, the industry being regulated by the government often has lobbied for that political intervention, or when this is not the case, has come to see it as an opportunity to use the regulatory intervention as means of raising the “barriers to entry” to any would-be new entrants and enterprises that might want to compete against the existing and established firms in that corner of the market.
Therefore, one of the central purposes of leaving markets free of government control is precisely to not block the way to potential rivals and to force the current firms in that industry to more effectively compete and innovate to maintain any profitable position in the market; and to permit the flexibility and adaptability to changing market conditions. It is open competition that assures consumer-oriented production and pricing, and it is government regulation that tends to foster rules and restrictions designed to shelter existing firms from new and creative competition.
If any such firms may be clothed with a “black hat,” it is those who wish to use the government’s regulatory power to, therefore, stymy market competition. The fault is not with a free market, but from the introduction of government interventions and regulatory agencies manned by those who presume to know what is better for people than those people themselves, and whose activities almost inescapably always fall victim to the designs of the larger companies those agencies are set up to regulate.
In addition, sight should not be lost of the self-interested purposes of those who live on and off government agencies such as the FDA and the CDC. Their recent responses to attempts to introduce methods and procedures outside of their straitjacket of regulatory control demonstrates their desire not to permit the weakening of the institutional structures by which they justify their power, positions, and incomes within the government maze of bureaucracies.
Price Controls Only Make Supply Situations Worse
The other ingredient in the regulatory mix is that when a crisis occurs such as the latest one in the form of the Coronavirus, concerns and even “panic” break out among many people in an attempt to obtain supplies of those goods viewed as essential or desirable to meet the real and imagined circumstances now facing them in the impacted communities. Around the United States, most recently, fears of mandated lockdowns and voluntary quarantining to reduce spreading of the Coronavirus may reduce or stop the availability of such essential products as toilet paper or bacterial and virus-reducing cleaning products.
Retail store shelves normally filled with such products are either empty or low in inventory. People have been scurrying from store to store in search of any brand name and type of toilet paper, for instance, even if they are not sure whether it might not “rub them the wrong way!” In the face of normal production levels and shipment schedules, quantities in the supply line to the retail stores have been lacking due to the unusual and unexpected increase in immediate demand.
To prevent “price gouging” 34 states currently have laws on the books making it illegal to “excessively” increase prices on high demand goods during a declared or generally considered “emergency.” This is meant to prevent those selling these products from “unfairly” taking advantage of people needing and wanting such products.
After forty centuries of price controls, it would be hoped that, finally, the counterproductive and disastrous effects of all such systems of government-imposed price controls would have been learned by now. But, alas, not. Market prices have work to do, including in times of social crises such as the one with the Coronavirus. But the government price controllers seem to never learn.
Price flexibility enables the coordination and balancing of market supplies and demands at moments in time and across time, given the degree of demand for goods and the existing supplies of them in the same time frames. Market-generated prices create the incentives for consumers to economize in the face of increased demands or reduced supply, and they create incentives for sellers to find ways to increase production and availability when there is a decrease in existing supply or an increase in consumer demands to buy.
Prices Convey Knowledge and Coordinate Markets
As F. A. Hayek also emphasized, all of the knowledge in society exists in no one place or in any one mind or group of minds, no matter how knowledgeable and well-informed those individuals may consider themselves to be. Knowledge, in its many facets and forms, is dispersed and decentralized among all the minds of all the people in society in their, respective, corners of the world.
The “social problem,” Hayek argued, is to have some means and method to bring to bear what others know that can serve the purposes and needs we may have in mind when we are inescapably separated from each other by time and space. That is the communication role of a competitive and unrestricted price system. People in different parts of the country or the globe are able to inform each other about what they want or what they can supply through the medium of market prices. It is like a shorthand or Morse Code of supplying to others the relevant minimum of information about what and where and at what value people somewhere want and would be willing to buy what those others might have available or could produce to fill the demand.
While the concern has recently been expressed about the general availability of Coronavirus testing kits, effective face masks, respiratory equipment, and related medical supplies, the fact is that there are different intensities of demand for them, given where the higher clusters of reported or feared cases of infected people are located around the country. Allowing the price system to openly and competitively function, with no government rationing scheme preventing or delaying supply-shifting from less to more urgent areas, would rapidly assure that the existing supplies of these things were more efficiently and effectively reallocated to where prices indicated they were most in demand to meet the medical needs for them.
But not only will a functioning price system for these and other goods bring about a more “rational” allocation of the scarce and given quantities of these goods in the present, but rising and unrestrained prices for the various goods, with no penalty for profits earned from their current and future sale, would also serve as the essential method and mechanism to generate the incentives to increase their supplies over time and work to improve their effectiveness in fighting the virus. That is part of the advantage, dare I say, beauty, of setting creative minds free with the liberty to reap the benefits from applying their talents to solve a social problem like the current one.
The Coronavirus crisis has been compared to the seriousness of war against a life-threatening enemy. It is perhaps interesting to note that in September 1939, as Great Britain just entered into its war against Nazi Germany and the British economy needed to gear up for the conflict through new patterns for using resources and goods away from civilian uses to military production, Hayek wrote an article making the case for leaving market prices free from government controls:
“The required quantities of the urgently needed factors of production ought to be released from those uses in which they can be dispensed with at the least sacrifice of other necessary things. But this is just what will happen if the scarce factor rises in price, since producers will dispense with it precisely for those purposes where it costs least to do without it . . . A little consideration will show that a rise in price is incomparably more efficient a method of bringing forth the additional supplies than alternative methods of achieving the same result [through price controls and rationing].”
Price controls only succeed in short-circuiting the means of people to converse and communicate with each other so they can share vital information in the simplest and most adaptable form to constantly and continuously bring about the short-term and longer-term adjustments of goods and resources to meet the needs of people, including at a moment of a crisis like the present one. (See my article, “Price Controls Attack the Freedom of Speech”.)
Using the Coronavirus as a Rationale for Economic Nationalism
The Coronavirus crisis began in China, and the world soon saw the Chinese government’s draconian locking down and shutting in of areas of the country containing tens of millions of people in the attempt to stop or slow down the spread of the virus. The supply chains of raw materials, component parts, and manufacturing and product assembly that interdependently link China with the economies of many other countries around the world were suddenly disrupted and thrown into disarray.
Companies in countries not yet significantly affected by the Coronavirus searched around for possible substitute supplies and warned of the unavailability of various goods due to the production stoppages in the Chinese stages of numerous production processes.
In this setting, voices are being heard calling for a turn to greater economic nationalism, with government limiting a continuing dependency on, for instance, the Chinese market. For example, conservative writer Patrick Buchanan said in his March 13 column: “In retrospect, was it wise to have relied on China to produce essential parts for the supply chains of goods vital to our national security? Does it appear wise to have moved the production of pharmaceuticals and lifesaving drugs for heart disease, strokes and diabetes to China?”
The implication being that the U.S. government should manipulate the market through taxes, protectionism, and regulations to bring these productions back to America.
Economic nationalists like Buchanan seem to be applying Rahm Emanuel’s now famous phrase of never letting a serious crisis go to waste in the service of a political agenda that might be harder to push in calmer social and economic times. Supply chain stoppages and shortages that could and would easily be reversed once the virus finishes running its course, and if governments kept out of the way and allowed production relationships between companies and countries to restore and rebalance themselves, are being used as rationales for restricting a market-based global network of specialization and division of labor.
The Benefits from Trade and Temporary Disruptions
My neighbor, in turn, sells me his product for that $10 because the $10 that he earns enables him to buy something he desires that would cost him more than the $10 if he were to try to make that product for himself. Each of us gets a bargain; we each get what we want from the other at better terms (lower costs) than if we attempted to do so through autarky; that is, economic self-sufficiency, in some or all the things we might otherwise be able to obtain in exchange from trading partners literally next door or halfway around the world.
A wide variety of political criticisms easily may be made against the communist government in China in terms of both its domestic and foreign policies, and a proponent of a free-market liberal society could easily make that into a very long list. But the Coronavirus fits more in the category of a natural disaster, like an earthquake or a hurricane, that disrupts and destroys lives and property, and reduces economic potentials and possibilities for a period of time.
Again, assuming no undue government interventions getting in the way, the human beings whose actions are behind all the work, savings and investment in society, usually undertake the needed reconstruction and rebuilding within a reasonable period of time, after which “life goes on as before.”
Tragically, several thousands of lives have been and many more may be lost before the Coronavirus runs its course around the world. And in the meantime, production processes are and will be slowed down or temporarily halted. But factory buildings have not collapsed, farmlands have not been swallowed up by the earth, great fires have not destroyed places where people live, and cities still stand just as they did before the virus started making people ill.
In other words, “this too will pass,” and people will go back to work, get back to eating out at restaurants, shopping at their favorite stores, and planning their next vacations at home and abroad. While many in society are experiencing a high degree of anxiety and panic due to the uncertainties surrounding some of the properties of this virus, and while the mass media and governments have helped fuel those fears, the fact is that this virus is just a “cousin” of the serious flus that strike humanity around the globe with almost clockwork annual regularity, and which, unfortunately, take tens of thousands of lives each time.
If a hurricane or a drought wipes out the orange harvest in Florida, we would consider it foolish if the people and government of Alaska decided that it would now be wise to invest in hothouses to have orange “independence” at home due to the uncertainties of Florida weather. Wholesalers and retailers in Alaska search out temporary substitute suppliers of oranges located somewhere else in the world, and then return to buying oranges from Florida next season, if once more Florida farmers offer the better fruit at the more attractive price.
A very bad lesson, therefore, from the Coronavirus episode would be to in any way suggest that the disruptions caused by it to the supply chains of international trade justify severing through deliberate government policy the near universal benefits that all of us everywhere on the planet gain from participating in the worldwide system of division of labor, which now includes China. The citizens of any country whose government attempted to do so would experience losses in their qualities and standards of living that have been and can be theirs only through the collaborative global interdependencies of market-oriented specialization and trade.
A Diarrhea of Dollars and Deficit Spending
The economywide disruptions being caused by the Coronavirus are once again bringing forth all the standard macroeconomic panaceas in the form of “activist” monetary and fiscal policies. On Sunday, March 15, the evening before the Monday morning opening of the U. S stock exchanges, the Federal Reserve announced that it would be buying $500 billion in government treasuries and $200 billion in mortgage-backed securities in the coming weeks and months, basically adding three-quarters of an extra $1 trillion to the American banking system. This is combined with the Federal Reserve’s decision to lower its benchmark discount window interest rate (the rate that the Fed charges member banks for short-term lending) to 0.25 percent, in other words, virtually to zero.
At the same time, Congress has passed, and the president has signed two spending bills as emergency expenditures to counteract negative financial impacts of the Coronavirus, additional government expenditures that come to nearly $60 billion – with possibly even a lot more to come. For the first five months of the federal government’s current fiscal year (October 2019-February 2020), Uncle Sam has already run a budget deficit of $625 billion, with the projection that the deficit for the full fiscal year that will end on September 30, 2020 will be over $1 trillion before these new additions to government spending.
The Federal Reserve’s “easy money” policy is supposed to stimulate additional private sector investment and related borrowing to boost production and employment. The federal government’s additional deficit spending is meant to increase demand to create consumer-end and other sales to increase profit margins as a means to sustain or increase output and jobs.
Successful Production Comes Before Coordinated Consumption
All of these are stereotypical “Keynesian” policies designed to get an economy out of a recession caused by a falling off of “aggregate demand.” But, if anything, the global economy effects from the Coronavirus is demonstrating the logic and reality of Say’s Law, named after the 19th century French economist, Jean-Baptiste Say (1767-1832). At the end of the day, there is no consumption without production, and, therefore, there is nothing to demand and demand with, without supply.
If you want to eat, you must first plant the crop and wait for it to mature for harvesting at some point in the future. If you want a woolen sweater, you must first raise sheep, wait for their wool to grow, and then after shearing the sheep, manufacture it with all the related inputs into the sweater you’d like to wear. If you want to have something to write with . . . well, maybe it would be better to just read Leonard Read’s famous account in his essay, “I, Pencil.” (See my article, “Jean Baptiste Say and the ‘Law of Markets’”. )
If production falls off, then the ability to either consume directly what you have produced or to sell it to others as your demand for what they may have for sale declines as well. In China first, and now in an increasing number of countries in Europe, people have been told or commanded by their governments to stay home to self-distance themselves from others as a means of minimizing spread of the virus.
To the extent that factories slow or shut down due to work forces being instructed by governments or their employers to not come to work to fight the spread of the virus, the individual outputs of those businesses decrease or stop; and, therefore, in the aggregate, supply of output as a whole declines, which is only a statistical adding up of all the individual outputs produced by individual firms and enterprises.
Governments cannot be telling people to both curtail their workplace presence and activities to stop a spreading of the virus and, at the same time, maintain their income-based expenditures on the outputs of their national economies. The panic buying that has been seen in many parts of the United States is clearing out existing inventories of goods currently available in retail stores. Replenishing them each day and every week is dependent upon continuing and redirected production reflecting the greater than usual relative patterns of consumer demand for what are widely defined as “essentials” and “necessities” in the present crisis atmosphere.
Increasing dollar or nominal spending via greater government deficit spending does nothing to “stimulate” the maintenance of production and employment if workers are quarantined, factories are partly or totally idle, and goods cannot, therefore, be forthcoming in their usual or changed patterns of demand reflecting upon on what the government spends those billions of extra dollars.
Likewise, the presumed attractiveness of zero rates of interest cannot generate real additional investment spending when the available supplies of labor and other factors of production are on the sidelines due to “social distancing” that restricts people’s participation in the market. (See my article, “The Myth of Aggregate Demand and Supply”.)
Financial Markets Without an Interest Rate Steering Mechanism
We should also not lose sight of the fact that financial markets, due to Federal Reserve policy in recent years and now reinforced with this latest interest rate and security-buying announcement, are operating without a fully functioning price system. Interest rates are meant to be the intertemporal prices to borrow and invest scarce resources across time from willing lenders forgoing the use of their own savings for a period of time.
Zero or near-zero rates of interest must mean either that no one wants to borrow for anything and therefore investment demand is zero, or the economy is so awash in savings that there is more real savings in the economy than a fully satiated investment demand to use that savings for future-oriented production, and therefore savings trades at a zero price. Neither of these conditions can be presumed to hold; that is, either no investment demand of any type for available real savings or so much savings that no investment demand no matter how unprofitable need go unsatisfied from lack of savings.
Of course, we do not fully know what market interest rates should be in either “normal” circumstances or in a virus-based crisis situation like at the present because monetary and credit expansion and interest rate setting and manipulating by the Federal Reserve has and does prevent us from knowing what is the real savings that there may be in the economy and what are the actual market-based profitable investment demands for borrowing at rates of interest formed and set by the interacting forces of supply and demand freed from central bank intervention.
In Some Uncharted Waters Due to the Coronavirus Crisis
In the current climate of public hysteria, mass media hype, and wide-open fiscal and monetary sluice gates, with the possibility of government anti-gouging price controls and “essential goods” rationing, trying to say what policy “X” must and will bring about is impossible to say with complete confidence. But in a situation of declining production due to quarantining and massive increases in potential purchasing power coming on the market via monetary expansion and deficit spending this would suggest, in “normal” times, highly inflationary problems ahead.
But if political pressures bring about municipal, state-level and/or federal systems of price controls and rationing, the result would then be what German economist Wilhelm Röpke (1899-1966) called “repressed inflation.” You’d have resource and commodity bottlenecks with shortages of a growing number of those “essential” and non-essential goods, at controlled and fixed prices, with government-directed allocations for goods for production and consumption. The end product would be a system of government central planning, regardless of what the president and Congress decided to call it.
This is, of course, a “worst case” scenario. Chances are it would be a hodge-podge of politically driven incoherent and inconsistent policies introduced on the fly to meet the expediencies and emotions of the moment, and especially in a presidential election year when everyone is desperately pandering for campaign contributions and votes on election day in November.
Or, maybe, the Coronavirus crisis in America will not be as bad and as damaging as many in the scientific community honestly fear. The whole business may blow over in a few months, like other harmful and killer flu seasons. If this, hopefully, turns out to be the case, the whole episode will merely be another teaching moment in misguided and damaging government policies that markets, once again, successfully endured and survived.