- Paul Krugman’s Ad Hominem Defense of Central Banking - August 4, 2020
- Gold and Free Banking Versus Central Banking - July 28, 2020
- “Systemic Racism” Theory is the New Political Tribalism - July 21, 2020
The coronavirus crisis that has enveloped the world has brought about calls for society and economy-wide action on the part of governments that has been matched by the imposing of radical shutdowns and compulsory mass quarantining as tens of millions of people are told to not to go to work and to stay at home instead.
Governments have also been redirecting essential medical and related supplies in some places. In the United States, direct governmental commands for companies and industries to change what and how they produce has been declared to be in the executive hands of the president of the United States, when it is deemed necessary to meet the needs of the health crisis.
President Donald Trump’s recent order for the automobile manufacturer, General Motors, to shift its production potentials to the manufacturing of ventilators for those stricken severely by the virus, under the authority of a Korean-war era piece of legislation, is merely an especially high-profile example of the central planning powers that governments have been asserting the right to implement.
Fundamental to everything that governments have been doing is the presumption that the crisis can only be handled and solved through a comprehensive system of political command and control. The chorus of voices making this case, along with their own proposals as to what should be the ingredients of “the plan,” has been deafening.
The Deafening Chorus of Voices for Central Planning
John Cassidy, writing for The New Yorker (March 28, 2020), insists that “the most effective stimulus policy is doing whatever it takes to get some control over the virus’s trajectory.” He praised the bipartisanship of the Democrats and Republicans in successfully passing the $2 trillion spending package to “stabilize” the economy in the face of various levels of government ordering people to stop working and, therefore, to slow down or stop the flow of various goods and services from which come the streams of income dependent upon supplies being produced to meet market demands.
Over at “Project Syndicate,” Harvard University professor Carmen M. Reinhart says “the lockdown and distancing policies that are saving lives also carry an enormous economic cost,” and insists, “Clearly, this is a ‘whatever-it-takes’ moment for large-scale outside-the-box fiscal and monetary policies.”
Also writing for “Project Syndicate,” economists Roman Frydman (New York University) and Edmund S. Phelps (Columbia University and Nobel Prize winner) declare that, “the possibility of millions dying as the economy is crippled justifies substantially scaling up the extent and the scope of government action . . . citizens and governments should be prepared to pay what might appear an extravagantly high premium.”
Among the government actions that Frydman and Phelps propose are the government redirecting the existing productive capacity to meet health care equipment shortages; financially supporting business firms to supply “essential” goods and services; supplying the needed quantities of money so people have the financial means to continue buying the goods and services they need; and a program to cover home and other mortgages of those no longer able to meet their regular financial obligations.
They want government “helicopter money” to be ongoing rather than a one or two-shot affair to meet the financial requirements of virtually everyone’s buying needs. To meet the needed production requirements to manage health demands from the virus, they say that the private sector cannot be trusted to do the job on its own; thus, the government must determine and direct what firms produce, for which purposes, in what quantities, and with government funding to make sure the job gets done.
To prevent price gouging for such products and failure to pay reasonable salaries to the workers doing these jobs, they also basically call for price and wage controls to assure “reasonable wages” and prices for the products at “pre-crisis levels.” If we can get it all just right, the coronavirus will be defeated, they are saying, and the world will be saved from disaster. We just need the right central plan designed in its details just the right way.
Planning Political Paternalism in the Post-Coronavirus Era
Of course, others are already looking beyond the coronavirus crisis to what lessons will have been learned for enlightened and “rational” intervention to guide human conduct away from its just-too-human follies and foibles. James Kirkup, the director of the London-based Social Market Foundation, therefore, asks, “Will the Pandemic Kill Off Libertarianism?” (March 25, 2020).
He criticizes rational choice theory in economics because it assumes that human beings are “rational” calculating machines who dispassionately weigh the implied costs and benefits from their actions, including the knowable and objective probabilities of the risks from following one course of action instead of another. Then each of the social and market agents makes the more or less “correct” decision concerning what to do and in what directions.
But when James Kirkup looks around, he finds that real human beings operate very far from such a benchmark of rational conduct and decision-making. Every reasonable person, fairly early on once the implications of the coronavirus were publicly known, should have stopped going to pubs or their local gym; they should have no longer socialized in common areas like public parks or in the shoulder-to-shoulder everyday marketplace.
People just would not do the reasonable and rational things to assure their own health and safety as well as all those around them, including friends and family members. The critics of traditional economic theory were, once more, shown to be right – people are not rational calculators of the reasonable courses of action to follow. They are shortsighted in their thinking, they are illogical estimators of dangers and risks to themselves and others, and, therefore, they follow misguided notions of their self-interest that not only harms themselves but the rest of society as well.
Or as Kirkup suggests, “If people aren’t rational about a situation that risks tens of thousands of lives and deep damage to our society and economy, how much weight should we put on the idea of rational actors in future? . . . Put it another way: once you’ve closed pubs and banned people from going outside, imposing, say, a tax to deter people from consuming sugary drinks is going to seem like a very small thing indeed.”
Critics of Personal Choice, Old and New
So here we have a very interesting intellectual and ideological twist of fate. For more than 150 years, critics of the market disdained the economist’s emphasis on individual choice and pursuit of personal gain, especially reflected in the businessman’s quest for profit.
These critics insisted that there was more to life than self-interest and material betterment; that man was a social animal connected with others outside of just himself that transcended personal profit and loss. There were the deeper attachments and senses of shared belonging of “blood and soil” and the transcendent community into which one was born. In addition, the “rational economic man” model in economics was also condemned by these earlier critics for assuming such rationality when, “clearly,” man is guided in reality by illogical and irrational views, values, and visions of what is good or bad, and reasonable or reckless.
Now we find among the latest generation of critics of the free market the argument turned around, with it being said that precisely because humans are not these rational economic calculators of costs and benefits, and of personal and social gains and harms, the government must radically intervene in various and sundry ways to make people’s actions consistent with conduct that would reflect such rational economic calculations, if only human beings could be trusted with the freedom to act in such ways!
The post-coronavirus world, according to Kirkup, will have to be one of extended and extensive political paternalism to reduce the impact of human imperfection in people’s thinking processes and actions, in both great and small ways, that do not represent the “right choices” for themselves or others in society. In other words: “I’m with the government, and I am here to make you live your life and act in ways you should and would want to, if only you were as reasonable, rational, and logical as those in government who have been assigned the task of designing policies that will ‘nudge’ you in the directions that you will or should be thankful for, regardless if you realize it right now or in the future.”
The Hubris of the Political Paternalism
Herein lies both arrogance and hubris. There is the presumption of having found and distilled the correct and objective standards of judging and weighing alternatives on the basis of which the most rational choice would be made, when properly and accurately considering the relevant costs and benefits and degree and forms of risk facing each and every individual.
Who knows the logically correct and factually accurate data in the context of which a person should be making his decisions and choices? Clearly, the implied social engineer, the political paternalist, the economic “nudger” who will either directly command by requiring or prohibiting forms of conduct, or who will influence the terms of trade-offs “indirectly” through taxation, subsidy or regulation to move people into the proper courses of action.
This implies two ideas: first, that the planner and nudger knows the optimal or more desirable social outcome as a whole to which all the actions of the particular individuals should be moving the society; and, second, that the actions commanded or influenced by such government interventions are really “right” for the individual.
Behind this type of thinking, whether admitted to or not, is the belief that the social nudger assumes himself to be so far above and superior to others in his theoretical understanding, factual information, and valuational understanding of what is good for mankind and for all the individuals who make up humanity that he freely takes upon himself the authority and power to mold the shape of society and the destinies of all in it into the form that he considers the best.
Unintended Consequences of Human Action and History
Over 250 years after the Scottish moral philosopher Adam Ferguson (1723-1816) published his Essay on the History of Civil Society (1767), is it necessary to remind people of the reality of the limits to our knowledge and understanding of ourselves, others, and all the unanticipated and unknowable outcomes from the multitudes of mankind’s members interacting? Or that attempts to direct people in ways that they find undesirable only sets the stage for various forms of social conflict? Said Ferguson:
“Mankind, in following the present sense of their minds, in striving to remove inconveniences, or to gain apparent and contiguous advantages, arrives at ends to which their imagination could not anticipate . . . He who first said, ‘I will appropriate this field: I will leave it to my heirs’; did not perceive, that he was laying the foundation of civil law and political establishments . . .
“Men, in general, are sufficiently disposed to occupy themselves in forming projects and schemes; but he who would scheme and project for others, will find an opponent in every person who is disposed to scheme for himself . . .The crowd of mankind, are directed in their establishments and measures, by the circumstances in which they are placed; and seldom turned from their way, to follow the plan of any single projector.
“Every step and every movement of the multitudes, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments [institutions], which are indeed the result of human action, but not the execution of any human design . . .It may with more reason be affirmed of communities, that they admit of the greatest revolutions where no change is intended, and that the most refined politicians do not always know whither they are leading the state by their projects.” (p. 122)
Or as Austrian economist, Ludwig von Mises (1881-1973) concisely expressed it in Theory and History (1957):
“The historical process is not designed by individuals. It is the composite outcome of the intentional actions of all the individuals. No man can plan history. All he can plan and try to put into effect is his own actions which, jointly with the actions of other men, constitute the historical process. The Pilgrim Fathers did not plan to found the United States.” (p. 196)
These presumptuous political paternalists, claiming to know what is best for every individual and optimally good for the society as a whole, show an indefensible hubris in asserting that they can step out of the very society and historical processes of which they are a single participant and know with necessary and sufficient certainty how the destiny of humankind should be directed, to be nudged into the best of all worlds?
This was emphasized by another Austrian economist, Friedrich von Wieser (1851-1926) in Social Economics (1914):
“The economy is full of social institutions which serve the entire economy and are so harmonious in structure as to suggest that they are the creation of an organized social will . . . Such a social institution is illustrated by money, by the economic market, by the division of labor . . . finally by the economy [as a whole] itself, which is the greatest of these institutions, and includes all the others . . .
“How could any general contractual agreement be reached as to institutions whose being is still hidden in the mists of the future, and is only conceived in an incomplete manner by a few far-seeing persons, while the great mass can never clearly appreciate the nature of such an institution until it has actually attained it full form and is generally operative?” (p. 162)
Imperfect Would-be Paternalists are Closet Despots
Do these would-be nudging paternalists not get up each morning and put on their pants one leg at a time like the rest of us? Do they not sometimes give into everyday temptations and desires that their social scientific objectivity tells them is not always in their best interest? Are they not subject to the same imperfections and limits of knowledge like you and I are in often having retrospective thoughts on the errors and mistakes we have made? In other words, are they demigods to be trusted with the future of each and every one of us and the general society in which we all live? I will go out on a limb and suggest, probably not!
If they are correct that human foibles are too serious to be left up to the free choices of the individuals who make them, then how can those same imperfect and irrational individuals be trusted with the democratic right to vote for those who will be elected to government office? Not always knowing where their true interests lie, might they not elect wrong-thinking politicians who fail to appoint these very political paternalists to the policy making positions, without whose help society and the individuals in it could be doomed to disastrous consequences?
Is there, here, the faint scent of ideological and political despotism? Do these paternalists not have an inkling that as would-be government policy nudgers they are really societal noodges, political pests, irritatingly telling people how they should live, when those poor, irrational people – yes, you and me – would rather decide this for themselves?
And this gets us around to the earlier writers who we mentioned, above, those who consider a free, competitive, decentralized marketplace of supply and demand the wrong place to place trust in to solve the problems of a societal plague such as the coronavirus.
Comparing the Market to How Government Really Works
A good number of years ago, UCLA economist Harold Demsetz (1930-2019) pointed out the not infrequent tendency of critics of the market economy to compare markets as they work in the real world with a hypothetical ideal of a perfectly informed and only public interest-minded government, the latter being what he called the “the nirvana viewpoint.” It is then deduced that there are “market failures” all around us in contrast to a world in which that ideal government, manned by all-knowing, and perfectly “rational” politicians and bureaucrats, were put in charge instead.
Demsetz said that the working of real markets should be compared to how real governments operate. It would soon be seen that the society suffers from an abundant quantity of “government failures” in contrast to a vibrant and highly successful market economy.
When these critics who doubt the effectiveness of the market economy in a crisis such as the coronavirus suggest turning to the government to manage the problem, they suffer from the nirvana viewpoint that Demsetz challenged. The media has been full of stories about the failures of the Food and Drug Administration (FDA) and the Centers for Disease Control (CDC) in both thoughtfully preparing for such a dangerous health risk before it arrived, and then their bureaucratic rigidity and attempts at protecting their monopoly turf in failing to allow developments of private testing techniques for the virus, or the operation of independent labs performing the tests to speed up results, or in not permitting the manufacturing and supplying of essential medical equipment by private producers not completely under their regulatory thumbs.
What could be better examples of government failure, failures that are inherent in the way bureaucracies operate in top-down central planning structures of regulatory control and command. Information has to be collected and digested at various local points, then passed on up through the bureaucratic control chain to different levels of evaluation and summary until it reaches a high enough level of policy decision-making that an actual plan concerning a course of action may be designed and ordered to be implemented.
At each level is the “human element,” not just in the sense that people may make mistakes and poor judgments. But, also, in that the people at each level have their own implicit motives and agendas relating to their department’s authority and budget that influences how those responsible for evaluating and passing on information to the next higher level consider what is or is not “important” and relevant and consistent with the procedures and rationales for what each in the bureaucratic hierarchy is doing. This is the real world of government, not some hypothetical utopia of magical, wand-waving government that is ready, willing and able to solve all the problems of the world.
Allowing People to Use Localized Knowledge of Time and Place
In the meantime, people “on the ground” often are limited or restricted in their ability to use their own knowledge and judgments, based on their own skills, experiences, and abilities, to solve part of the problem, if they only had the liberty to try.
To give just one instance, Wales Online recently told the story of a Welshmen who devised a way to design and quickly construct a ventilator that can serve as a highly workable device in place of the more scarce and more costly traditional ventilators used in hospital ICUs. Dr. Rys Thomas designed it in three days drawing upon his military and civilian experience with the use of anesthetics and resuscitation; he began manufacturing in partnership with a small private enterprise. It was allowed to be produced with little red tape, fortunately, by the Welsh government. But if Dr. Thomas had had to submit documentation, proof of testing and trials, and a lengthy approval process according to the usual FDA procedures here in the United States, people might have died that are being helped to breathe right now in Wales.
This is the type of discovery and adaptation to changing circumstances that Austrian economist Friedrich A. Hayek (1899-1992), had in mind, I would suggest, when in his famous article on “The Use of Knowledge in Society” (1945), he referred to the special and local knowledge of time and place possessed by individuals “on the spot.” By people having the latitude and liberty to not only see an opportunity but the discretion and freedom to try to use it in advantageous ways, we all benefit from what other individuals, whom we know nothing about, may do that will end up benefiting us in ways we could not have originally imagined.
This all highlights, in my view, why the emphasis upon and calls for the concentration of centralized decision-making and planning by government in meeting the challenge of the coronavirus is completely wrong-headed. It should be exactly the reverse. We should not want to restrict what people are able and could do to one overarching and imposed leadership team meant to guide and coordinate all that is going on in society to overcome the health crisis through which we are all passing.
The whole purpose of competitive markets and the price system is to have an institutional setting in which each individual in his own corner of society and the social system of division of labor may freely utilize what he comes up with and sees as possible answers to various aspects of the problems constantly popping up in different places, in different ways, with different features and requirements, given the way the virus is spreading and impacting different areas and communities.
The continuous changeability and adaptability of a competitive price system serves to indicate to any and all interested or potentially relevant fellow members of society where demand is greatest for various items and services, and what supplies are available in which quantities to meet those shifting needs in different parts of the country, and, indeed, around the world. Prices and wages are the best rationing guide for people to economize “here” as best they can, until some supplies relatively more abundant and less urgently needed “there” can be transported and transferred from one part of the country to another.
Don’t Short-Circuit the Price System with Controls
That very much ridiculed and condemned profit motive acts as a wonderful incentive mechanism for people to more accurately anticipate the patterns of future market demands for these health-related products and to adjust to changes when they have not had perfect forethought in a world in which the future can never be perfectly known.
The last thing that should be imposed are price and wage controls, like Roman Frydman and Edmund Phelps and others have been calling for. This short-circuits the institutional mechanism that enables the coordination of more people who know far more than any one or handful of minds can ever know to best utilize what everyone can contribute to solving any one problem and those other problems that are in competition for the scarce resources and labor services of the society.
Through the price system, we all contribute through our demands and our abilities to supply to compositely determine what should be produced, where and how it should be produced, and for whom at any moment of time and over periods of time in changing circumstances. No other economic and social system of human association and cooperation has ever been found to better improve the condition of humankind, both in sickness and in health, and in “normal times” as well as in serious emergencies and crises, as the competitive, price-guiding market economy. (See my article, “Price Controls Attack the Freedom of Speech”.)
Finally, this also brings us back to James Kirkup’s presumption on the claimed irrationality of real human beings and the need to paternalistically nudge us all into the direction of choice-making based upon a postulated model of “rational economic man.” It is not a secret that we all, in hindsight, make numerous mistakes and misjudgments in our choices. I know this certainly applies to me; just ask my wife, who never tires of reminding me of my follies and foibles!
But I would suggest that often what the political paternalist, with his model of supposedly objective, rational behavior, is missing is the fact that much of what is criticized and condemned as illogical or irrational conduct needing “nudged” correction are often reasonable and rational choices, if only looked at in the context of the local knowledge and circumstances that only that individual may possess and fully appreciate concerning the situation, opportunities, and costs as he sees them during and over any given period of time.
What we need, in general, concerning our fellow human beings is a humility that we do not and cannot really know enough to tell others how they should live and for what purposes. Furthermore, none of us, even the self-appointed social engineers, know enough to plan the direction and destiny of human society.
As Ferguson and Mises and Wieser reminded us, social and historical processes are far too complex, multifaceted and unknowable to plan the destination of mankind. This all is no less true when needing to call upon and coordinate the knowledge and abilities of millions to confront a health crisis like the coronavirus. Liberty remains the best means of saving and bettering mankind.
What is the underlying premise behind all of these arguments, whether focused on the immediate coronavirus crisis or looking beyond to the world after the crisis is behind us? It is that freedom does not work or does not work as effectively as the critic thinks it should if this health crisis is to be successfully grappled with. It is once again considered to represent a “failure of the market” that can only be compensated and corrected for by turning command and control over to the government and to the guiding judgments and decisions of those holding high political office and the presumed “experts” manning the bureaus, agencies and departments that make up the government.