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.