Pandemic: how to avoid what is worse
In addition to major health issues, Covid -19 creates major economic problems. The risk of a deep global recession is very high. It is a shock that reduces supply, especially through the shock on the labor force, through illness or social distancing, resulting in the closure of many activities in different industries. Some activities were closed by private decisions, others were closed as a result of social distancing measures imposed by the authorities. Regardless of their source, these decisions triggered a supply-side shock, which translates into a shock on the demand side. The two shocks may be self-reinforcing and can lead to disaster.
Besides the tragedy of human casualties, which cannot be compared with anything, the worst-case scenario would be the one where, after a major economic crash, we will find that Western society has not learned the real reason why it was caught materially unprepared for a pandemic and, once again, as usual in such cases, an extreme event was used to erode freedoms.
Below I show why Western society was not adequately prepared for a pandemic and what it should learn from it, what should guide the interventions of governments and central banks in this crisis to avoid economic debacle and, finally, that we must fight against those who would like to use the current pandemic as another „marvelous excuse for global socialism”.
- Constructivist rationalism and the capacity to respond to pandemics
Social distancing is a way to reduce the spread of the disease. The main purpose of this measure is to avoid the spread of the virus to prevent the health system from being overwhelmed, thus preserving its capacity to save lives. However, no one knows how long the shutdown should last to stop the spread of the virus and thus reduce the highest cost, namely the loss of human lives. It is an uncertainty. Society should be as prepared as possible so that, when such uncertainty arises, it does not contribute itself to its deepening. As I will show in this section, the ability of the society to do this depends on the rationalism that it practices, deliberately or not.
Uncertainty about social distancing creates major problems for the public and private sectors in designing the adjustments they should implement to minimize economic losses and avoid a disruptive deterioration of macroeconomic stability.
In general, economic interdependencies make the financial problems of some firms extend to others as well. This process seems even more accelerated in the context of the economic anxiety created by the pandemic. Income flows are decreasing and more and more companies end up scaling down their activity or closing down altogether. This is a sure path to recession.
Could such a development be stopped relatively quickly? In a purely hypothetical case, the answer is yes. Imagine that it would have been possible to test all citizens who would have needed testing. Then it would have been easy to identify the people who should have been quarantined (let us call it „personalized quarantine”) at home or been admitted to hospitals from the beginning. On this basis, it could have been deduced what persons remained available to continue their activity (work, go on holidays, etc.) without the risk of spreading the infection. This would have allowed both the health problem to be solved and production in almost all areas to continue, including in the hardest hit sectors like tourism and air transport. The economic effects would have been minimal and the society could have better tended to the sick.
The solution is only hypothetical because it cannot be predicted from the outset what virus the society might face. The test, the same as an effective vaccine, can only be conceived after knowing the characteristics of the virus. The tests are produced gradually, so that the necessary stock to test all those requiring testing is not available from the beginning. That is why we know only a small part of those who carry the virus. Further on, because of this, the sectors that involve a great deal of people interaction and could not meet the social distancing requirements, such as tourism and air transport, were not able to continue their activity. On the other hand, hospitals insufficiently equipped with protection equipment for the medical staff continued their activity, later becoming temporarily inoperable because they had turned into epicenters of the outbreak themselves.
For the purpose of this article, we should note, as a first conclusion drawn from the aforementioned facts, that in many countries the testing capacity has increased gradually. More worrying and significant from the perspective of our discussion was the lack of protective materials such as masks, professional or not, gowns, disinfectants, etc. For these reasons taken together, and not for other reasons, the lockdown of activities involving close human interaction was inevitable . For the same reason, it was necessary to impose social distancing (the „stay home” action) and to restrict the free movement of people in many countries of the world.
However, there is an important difference between these two types of causes, i.e. between the lack of tests and the lack of adequate material preparation. Even though nowadays it is impossible to know precisely beforehand what virus will emerge and what tests need to be manufactured, it is still possible to know in advance that pandemics are possible and that they can have an extreme territorial spread and can affect tens of millions of people. Naturally, the emergence of the new coronavirus acted as a shock (something impossible to predict) regarding the availability of tests, but it should not have come as a shock in terms of preparations for the other materials common to any pandemic. Therefore, material preparation for a pandemic should, in principle, be adequate. However, it was exactly this lesson that was failed this time as well, not only in Romania, but in almost all countries and there is no excuse for not learning it. A WHO essay shows that, in the early years of our century , „most experts believed that the exotic pathogens that cause so much misery in Africa and densely-populated parts of South-East Asia would never become a problem in wealthy countries, with their high standards of living and well-developed health systems.” (https://www.who.int/csr/disease/ebola/ebola-6-months/myths/en/.
Probably this confidence of the experts referred to in the essay was based on the period spanning more than three decades in which the rich world had not experienced a pandemic in general. But the current pandemic is more like that of 1918-1920, at least in terms of the magnitude of surprise, so we can say that the belief that such a pandemic is highly unlikely was based on a period much longer, of more than one century. In addition, the belief also came from the fact that during the previous century’s last pandemic, that of 1968, the vaccine had been discovered relatively quickly, although only after the spread of the disease had peaked in several countries (see Encyclopedia Britannica). This confidence should have been severely shaken in 2003, when SARS (Severe Acute Respiratory Syndrome) had the greatest impact on wealthy urban areas, and in 2009, when the first pandemic of the 21st century (influenza A (H1N1)) hit.
However, the lack of material preparation that the coronavirus reveals all over the world seems to show that the lesson has not been learned, at least not by those who run the public health systems and, in a broader sense, by the western elites. The exception was partially the Asian countries that faced SARS in 2003, which made them somewhat better prepared. Some have speculated that the stronger reaction in China was rather a commendable reflex of communism, but this idea, as I will show below, is simply false. The „living memory” of SARS within the Asian societies is the one that best explains the response (see Daniel Gros, ‘’The West’s COVID-19 Learning Curve’’, https://www.project-syndicate.org/commentary/covid19-learning-curve-slow-western-response-by-daniel-gros-2020-03).
The lack of material preparation of the western countries seems to reflect the belief that a pandemic of such geographical coverage and with such a large number of victims would no longer be possible or, in the worst case, have a very low probability, given the level of civilization and material prosperity in these countries. In turn, the belief was a consequence of the trust of specialists (the professional elite) in the ability of science to find fast treatment solutions and to avoid contagion on a sufficiently large scale to exceed the private and public capacity for effective intervention.
Confidence in our science to protect us against „exotic pathogens” and to solve the problems we are facing relatively quickly is a reflex of the constructivist rationalism (term introduced by Hayek) that dominates the thinking of the ruling elites in Western societies and the thinking of the largest part of elites in social sciences. This rationalism has borrowed in an epistemologically illegitimate way methods used in the natural sciences to deduce regularities. The century that passed from the great pandemic of 1918-1920 without a similar one breaking out until this year was seen as the incarnation of a regularity. Thus, it was concluded that the emergence of a pandemic in developed societies has such a low probability that it can be neglected or that, if it does occur, defense solutions will be delivered relatively quickly.
Western countries were taken by surprise only because the idea of such an event that could not be quickly kept in check was rejected by the rationalism we practice. The paternalistic traits developed in the society because of the constructivist rationalism of the elites led to the “de-responsibilization” of the individual, who had learned, back in the days when liberalism prevailed, the importance of maintaining individual vigilance, synthesized in the phrase si vis pacem, para bellum! In other words, it has been accepted that society has evolved so much, both materially and scientifically, that one of the assumptions we can use when designing certain systems is that a pandemic cannot occur or, if it does, it can be quickly contained by our science. That dimension of globalization reflected in the boom of direct international human interactions could not have appeared if the prevailing hypothesis had been that a pandemic which could reach all parts of the globe would be possible.
The extremely low probability hypothesis of a pandemic has been incorporated into private and public decisions on the sizing of drug and equipment endowment capacity of private or public medical units. Constructivist rationalism has neglected historical evidence regarding the non-negligible probability of such a pandemic occurring in human society, globalized or not. Talk about erroneous thinking. The rationalism used in the natural sciences has done enormous good to society. When it was borrowed to be applied in the social sciences, where it is an intruder, rationalism became constructivist and wreaked havoc.
- What should guide the intervention of governments and central banks
The shock on production generated by social distancing required to contain infections with the new coronavirus seems very much like the shocks produced by any other trigger of a recession. However, there is one major difference. In general, after the Second World War, three types of triggers were at play: tightening of monetary policy (demand-driven recession), changes in expectations (demand) and shocks in the prices of major commodities (supply). The recessions thus triggered were ultimately the result of developments that culminated in the formation of economic structures (interconnected behaviors ) that became unsustainable. Those recessions were meant to correct the structure of the economy that had become unsustainable by eliminating behaviors turned anachronistic or unsustainable. From this perspective, recessions were a form of manifestation of the spontaneous order principle.
The recession caused by social distancing is neither the result nor proof that the structure of the world economy became unsustainable at the beginning of 2020. The recession triggered by COVID-19 is, by its nature, different from the others. It is not a creative destruction governed by the necessity of failure. However, some behaviors were probably closer to becoming unsustainable than others. Therefore, this recession as well might adjust or even eliminate in the first place those elements (behaviors) of the structure that had come closest to their unsustainable levels or conditions. However, no individual or organization (government agency, central bank, government) knows which those elements are. Economic policymakers need to understand that the „mind” of the spontaneous order, superior to any other mind, was continuing to operate the structure of the economy at the time when the virus-induced shock hit.
This distinction is important because it helps us better understand what role governments and central banks (as organizations) can play in avoiding an economic depression and taking the economy out of recession. In those cases where recessions represented a spontaneous abrupt correction made by the markets to transform the old and unsustainable economic structure into a new and sustainable one, the intervention of central banks and governments alleviated economic stress by facilitating the preservation of some of the unviable elements of the old economic structure. Those organizations were temporarily opposing the spontaneous order. We can assume that, because of this, the new structure that brought the economy out of recession became sustainable for a shorter period of time, compared to one that would have resulted without the protection offered by governments and central banks to certain behaviors, industries or activities that should have been adjusted differently had the spontaneous order process been complete.
At the outset of the pandemic, the structure of the economy was functional. For example, unlike the period before 2008, the world’s economies were not generally characterized by large imbalances. The 2008-2009 market-induced recession showed those behaviors and their relationships that became unsustainable and imposed corrections. The global recession that emerged as a result of social distancing imposed under necessity by the authorities does not show which behaviors and which links between them had become unsustainable market-wise. Governments and central banks do not have the necessary knowledge to tell if another economic structure would be better than the one that had been spontaneously generated by the markets and had functioned to the fullest extent until the emergence of the shock produced by the new coronavirus through the social distancing it led to. For this reason, it is justified that the measures to be taken by governments should be oriented towards both avoiding, as far as possible, the further deterioration of that economic structure that had emerged spontaneously and creating the conditions for its recovery.
With these clarifications, we can analyze the ideas that have circulated about how governments and central banks should intervene. This time, in this recession, the organizations called central banks and governments not only must not oppose the spontaneous order, but can and even must act in the same direction with it. The key idea that I propose is that governments and central banks should identify the material, human and financial effort needed to restore the pre-crisis behaviors and relationships between them. In order for those institutions to solve this problem correctly, it is necessary to apply principles that allow minimizing the cost of the support given for the restoration in broad terms of the only authentic economic structure, namely the one created by spontaneous order before the crisis.
First of all, it must be acknowledged that there is no capitalism crisis on three segments, as some authors try to argue, namely health, economic and climate (see Mariana Mazzucato, „Capitalism’s Triple Crisis”, https://www.project-syndicate.org/commentary/covid19-crises-of-capitalism-new-state-role-by-mariana-mazzucato-2020-03). The new coronavirus does not reveal the weaknesses of capitalism. What the ”criminal virus” does reveal is the type of rationalism we use to interfere with the spontaneous order that capitalism, as a way of organizing society, relies on. This type of rationalism is the ultimate cause for the society’s lack of material preparation in the face of a pandemic, as we have shown in the first section. Consequently, the only problems that need to be solved are that of the crisis in the health sector and the economic one (the recession), so that we can recover, in the essential lines, the structure of the economy that existed at the outset of the crisis. The problem of repairing the capitalist system by the state is a false one. In particular, climate issues mean industrial policies that change the structure of the economy on the assumption that we know, in advance, who produces climate change and with what consequences, which, again, is false. The capitalist society knows how to innovate, as it has so far demonstrated, and will consequently solve the problem of pollution (which is not necessarily the climate problem) in a sustainable way.
Second, central banks and governments should clearly identify the boundaries within which they can intervene. The role of central banks is to avoid panic in financial markets. Panic can destroy the structure of the economy that was functional before the shock generated by the pandemic, a structure that, as we have shown, is the only one proved viable, and which we know only partially and only through economic theories. Massive sales-offs are typical for panic in asset markets. Market participants sell any financial asset perceived as risky. Central banks must buy financial assets to stop the panic. The only asset that has a constant relationship between yield and price, when expressed in itself, is money. The yield of the money is zero and its price is equal to one. For this reason, the interest elasticity of the demand for money becomes virtually infinite in moments of panic and leads to the liquidity crisis in the asset markets. Central banks have a duty to maintain adequate liquidity in the asset market by expanding asset purchases. In this context, the idea that central banks are flooding markets with liquidity, as allegedly they did in the crisis of 2008, without directing it to the „best investment opportunities” unintentionally reveals the constructivist rationalist idea that the central bank would have the ability to choose winners. The central bank does not have this capacity.
Governments have a limited capacity to intervene if they do not want to produce high inflation that can get out of control. Increasing taxes is by no means a solution, although some economists or politicians think of it, even if they voice it only timidly by referring to a „solidarity” tax, which rather sounds good than produces net positive effects. The only viable solution involves mainly increasing public and private debt. However, this increase may be limited if governments choose a correct criterion to guide them in extending subsidies. To be clear, governments should increase public debt to the levels necessary to preserve the economic structure produced by spontaneous order before the pandemic. Any increases that result from opportunistic public or private behaviors will be at odds with the purpose of preserving the structure of the economy along its general lines. These behaviors usually come from politicians, because they want to throw money even where it is not needed, to get votes, or because they are prompted by emotions. These behaviors also come from entrepreneurs who, although not having real problems, try to benefit from aid, along with those who really have problems. We are already seeing a spread of these behaviors, from both politicians and entrepreneurs, which put enormous unnecessary pressure on governments.
It would be wrong that government subsidies for companies which can no longer operate due to social distancing be granted with attached conditions that would alter the structure of the economy instead of aiming to preserve it, according to the views expressed in this article. Making subsidies conditional on limiting the relationship between company and shareholders (share buyback), on carrying out future investments in reducing carbon emissions or in the so-called inclusive economic growth, as proposed by Mazzucato (cited above), could produce opposite effects to those envisaged. For example, inclusive economic growth lacks a unitary definition and, for this reason, there are conflicting views regarding the type of anti-poverty policies, going from those deliberately biased towards the poor, which is a rationalist constructivist view, to the liberal ones which consider that economic growth should be maximized by clarifying property rights, ensuring macroeconomic stability, fiscal discipline and free international trade, which would benefit everyone (for a detailed analysis of these views see, for example, Ranieri and Ramos, „Inclusive Growth: Building Up a Concept”, International Policy Center for Inclusive Growth, Working Paper 104, March). The conditions of the type mentioned above would not be in line with restoring the structure of the economy, which we accepted as the only legitimate global objective of the aid, but would lead to the adoption of an artificial structure of the economy, once the health and economic crises have been solved.
What should guide governments’ actions is a set of criteria to ensure that the goal of preserving the viable structure of the economy is achieved with the smallest increase in public debt. Solving this problem of optimal public debt issuance does not mean only setting the public debt issuance at levels consistent with the restoration of the pre-crisis economic structure, but also accepting the idea that recurrent waves of infections with the new coronavirus could be a factor in increasing public debt. As a result, increasing debt to fund an adequate social distancing, which really manages to prevent infection from returning, would ultimately be a necessary step precisely in the sense of minimizing public debt.
Also, the government should create mechanisms to ensure, alongside public subsidies, the use of private reserves (savings) as well. This does not mean confiscating these savings through taxes, but limiting public subsidies to levels considered acceptable. For example, the payment of allowances of 75 percent of the wages of employees in industries affected by social distancing secures the further match between the skills required by the activity of a closed company during social distancing and the labor force supply once companies resume operations. Similarly, postponing the payment of taxes or interest repayments, or providing state guarantees on some loans helps the company keep its employees, so that they can be present when activity resumes. This is essential for preserving the structure of the economy. In the meantime, it is up to employees to decide whether they want to use their private savings to maintain virtually all their previous consumer behaviors. It is also up to firms to decide if they use part of their reserves to pay full wages to avoid losing labor force to competition.
Finally, in order for the involvement of the private sector’ reserves to be complementary with the public funds, these aids (reduced salaries paid from public funds, deferred payment of interest rates, deferred payment of taxes, etc.) should be conditioned by the attainment of a minimum degree of economic stress by companies/employees. This principle is already applied in Europe in the design of bank moratoriums (see, for example, Cristian Bichi’s summary of banking moratoriums at http://www.opiniibnr.ro/index.php/macroeconomie/380-coronavirusul-si-moratoriile-bancare-din-unele-tari-europene).
If a higher degree of public debt is the price to pay to save the private sector and resume economic growth with a validated market structure, then so be it.
- Another „marvelous excuse for global socialism”
There are forces in society that not only do not understand that the only valid economic structure we know is the one created by spontaneous order, but also advocate its change, and not just anyway, but by attacking capitalism. These forces are permanently active. They feed on events such as a pandemic or other events whose magnitude is amplified with much material and propaganda effort to the „global problem” status. Margaret Thatcher once said that „global warming provides a marvelous excuse for global socialism”. It seems that the coronavirus is being used by the followers of socialism for the same purpose. Their supreme arguments on instituting equality are put aside for the moment. This ability of the ideologies of socialism to adapt by capitalizing on any context in favor of socialism is enviable.
The followers of socialism have abandoned the central, yet outdated idea of common ownership of the means of production as a way of materializing the illusory idea of economic equality, or of social justice or distributive justice as it has been called. Starting as early as the 1960s and more visibly through the 1970s and 1980s, the idea of achieving equality by establishing common ownership of the means of production was replaced by the idea of achieving social justice through redistribution, specifically by confiscating high-earners’ incomes through a massive increase in taxes. This led to a rapid increase in the share of social spending in GDP as early as the 1960s.
Today, again, advocates of socialist ideas tighten up the ranks. The objective is the same illusion of social equality. Their propaganda exploits the misfortune caused by the massive infection of the population with the new coronavirus. The central idea is that if anyone can do something in the fight against the deadly virus that is the government, or the state, as it is often called, although this sparks a series of confusions that serve the socialist ideas well. The ancillary idea is that the market could not do something to combat the virus and hence any similar misfortune.
In these days, as well as in those to follow, there will be a huge struggle to project the state and its coercive instruments as the only solution to be desired. There will be a fierce struggle to convince people that they are facing a great choice: on the one hand, going for a state that is involved in key areas, where medicines are provided, to start with what is most important today, energy, housing, bare necessities. On the other hand, opting for more liberalism, with the consequence of disruptions in critical situations. In connection with this latter aspect, the idea that the capitalist way of life is uncertain and is to blame for the misfortunes such as this kind of pandemic will be increasingly circulated. I have shown in the first section that it is not capitalism and liberal democracy that favor such misfortunes, but constructivist rationalism, which is natural to socialism, but which has infected capitalism as well, especially by eroding liberalism.
When we want to analyze and understand social processes, the idea that man cannot know the circumstances that accompany his decisions should permanently guide our thinking. We must understand that the same principle also applies to groups of people, including political parties, governments, parliaments, etc. This principle of limited knowledge of particular circumstances should be permanently awake in our minds, to prevent the transformation of problems or what is widely perceived as problems into extraordinary reasons for novel social engineering.
Socialism is an example of social engineering that has brought nothing good. It could not bring anything good because it could not innovate. And innovation disappeared in socialism because competition was replaced by centralized planning, designed by a group of people who believed that they could have knowledge of all the particular circumstances in which individuals act, which is impossible. Capitalism innovates because it allows competition. It is none other but capitalism based on the freedom of enterprise that will find the optimal solutions to reduce pollution through technological progress while also enabling further economic growth. This type of capitalism will succeed in producing everything necessary for a better life. And it will do so in a better way the sooner we find the solutions for the ruling elite and some of the elites in social sciences to revise their „fatal conceit” represented by constructivist rationalism.
Maintaining market freedom is essential. When it needs surgical masks, testing devices, efficient disinfectants, etc., the government buys them from the entrepreneurs that invented and produced them. These productions emerge because there is freedom to compete, with competition creating the incentives for permanent progress made through innovation. There is unlimited competition in the manufacture of toilet paper. The toilet paper crisis was resolved within a week. In the production of biocides and other similar materials, there are – and justifiably so – regulations that make competition more difficult. For this reason, the market response was slower. This should not be taken as criticism of the precaution that exists in the regulations regarding hazardous products, I am using the example because it is highly topical and known and it serves well the idea that, where possible, competition should be allowed to work.
In times like these, we should keep a closer eye on what happens to liberal democracy in Western societies and how adverse influences feed through, especially to liberalism. We should never forget Hayek’s conclusion that ”’Emergencies’ have always been the pretext on which the safeguards of individual liberty have been eroded”. We must not forget either the exhortation of King Michael I of Romania regarding the ongoing struggle for freedom. Finally, we should not overlook the exhortation of Vegetius (Igitur qui desiderat pacem, praeparet bellum), abbreviated in the phrase Si vis pacem, para bellum! (https://en.wikipedia.org/wiki/Si_vis_pacem,_para_bellum)
Article also published in The Market for Ideas, N0. 23, May-June 2020.