Balkinization: Trump doesn’t understand free markets

Trump doesn’t understand free markets

Andrew Koppelman

Friedrich Hayek famously argued that socialist central planning must fail. The basic problem is the immense amount of information that undergirds the complex division of labor. “As decentralisation has become necessary because nobody can consciously balance all the considerations bearing on the decisions of so many individuals, the co-ordination can clearly not be effected by ‘conscious control,’ but only by arrangements which convey to each agent the information he must possess in order effectively to adjust his decisions to those of others.” The irreplaceable virtue of free markets, Hayek thought, is their capacity to take advantage of that flood of information. The opportunity cost of using any resource, or the value of shares of any business, are encoded in prices. The price system is the crucial coordinating mechanism.

The recent bear market is an example of the price system doing what it is supposed to do. Because of the coronavirus, the likely returns of assets are less than they were expected to be. The world economy will inevitably produce fewer goods and services, because the need to quarantine will inevitably lead people to avoid activities that otherwise would have created wealth. Quite a lot of business is done in face-to-face transactions, and a lot of those transactions now won’t happen. Stocks are worth less for the excellent reason that prices have adjusted, reflecting the fact that the world is going to produce less.

President Trump’s recent efforts to goose the economy back into action reveals a failure to grasp this basic fact. His notion that he can do something, from the center of government, to fix things reveal him to be as deluded as Bernie Sanders about the possibilities of central planning.

We can do things to ameliorate the damage: keep the newly unemployed from being financially ruined, provide sick leave to keep infected people from having to go back to work, and so forth. And of course the administration’s response to the disease itself is grotesquely incompetent, and the patent dishonesty has itself frightened the markets into deeper despair.

There is no way we can return to the former level of productivity without inducing people to recklessly endanger their lives. The economy is in fact weaker, and it would not help for it to act as though it were better. To draw an analogy with medicine – and what better analogy could there be at a time like this? - the notion that you can jumpstart the economy with lower interest rates, fiscal stimulus, etc. is like thinking that when a patient is bedridden with pneumonia, you can make her better by pumping her full of methamphetamine. It may briefly invigorate her, but it won’t be good for her health.

Posted 10:32 PM by Andrew Koppelman [link]