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Will the Coronavirus Amplify the Role of the Government in the Economy?

Will the Coronavirus Amplify the Role of the Government in the Economy?

A defining phenomenon for virtually the last hundred years is the expansion of state influence in all areas. The extreme was reached in the communist and fascist countries, where, under dictatorship, all freedoms were altered. In Western democracies, freedoms made progress, but the struggle between governments and markets to play the central role in managing the economy has sometimes resulted in serious disruptions of market freedom. The alteration occurred due to serious economic difficulties. The drastic limitation of the freedom of financial markets after the crisis of 1929-1933 is known. More recently, the economic and social difficulties that emerged after 2008 have been used by governments to limit the freedom of financial markets and to increase the state’s role in managing the economy. Will a severe recession caused by the coronavirus be an opportunity for a renewed strengthening of this trend? The concern for the principle of market freedom contained in this question could be seen as injudicious, as the functioning of the society seems to be dictated by the rapid resolution of various situations that appear to us as urgent. However, neglecting the principles in decision-making could be a way that may go unnoticed of moving to a type of society that we do not want.

The temptation of governments to limit market freedom following a severe recession affecting employment has two major determinants. One is that, for reasons related to their very existence, governments must show that they are “doing something” to prove their “usefulness”, even if the true utility that governments have for the public is totally different from that which they invent in times of crisis. The governments in office and the parties that support them lose if, in times of economic crisis, they do not show that they are doing something. This is because, after the spread of the Keynesian view on state intervention, governments find themselves in an expectations trap: (i) the public expects intervention at difficult times and (ii) the public penalizes the failure to meet expectations (non-intervention), even if in the absence of action there were no negative effects.

The other reason why governments limit the freedom of markets is the type of rationalism prevailing in the economic science based on which governments set up their economic policies. Essentially, beyond the competition between different schools of thought, economic science sees two competing types of rationalism: that of spontaneous order (coined by Röpke ([1937], 1963), but taken to the highest level by Hayek, 1993) and the “constructivist” one, as Hayek called it, usually preferred by governments.

The spontaneous order is specific to systems that are complex by nature (“essentially complex”, in Hayek’s words), such as the society and the economy. The spontaneous order “results from the individual elements adapting themselves to circumstances which directly affect only some of them, and which in their totality need not be known to anyone.” In this process of human action there are beneficial results for the society without having a human project concerning them. It is essential that the spontaneous order “may extend to circumstances so complex that no mind can comprehend them all” (Hayek, 1993, Vol. 1, p. 41). The “mind” that manifests itself by the spontaneous order is far superior to any individual mind. At the opposite end, constructivist rationalism conceives that people can set particular goals for society because, by methods similar to those of the natural sciences, they can deduce regularities on the basis of which they can estimate the effects of the measures they conceive and therefore can achieve the proposed goals. While in the economy spontaneous order is market-specific, constructivist rationalism is usually, as I have mentioned, embraced by governments, although not necessarily all governments have embraced this type of rationalism and have not sought to limit market freedom. However, as a rule, governments rely on constructivist rationalism, in particular because of the illusion that it offers about the control that governments can have on the implications resulting from the policies promoted. For this reason, the two administrators of the economy usually have different preferences regarding the freedom of the markets, and governments usually want to be the main administrator of the economy.

But to what extent is the government entitled to aspire to this position? To make things clear, let us note that governments did not appear spontaneously. They were from the beginning a deliberate creation, an organization within the society, in order to achieve well-defined – but anyway limited – tasks. Hayek pointed out, explaining the principle of the social division of knowledge, why no one, so not even the government, possesses the necessary knowledge of all the particular circumstances of the individual action in order to effectively organize the society. Like any other organization, the government is aiming for better cooperation to achieve its goals limited by this knowledge.

Unlike the government, society as a whole is the result of spontaneous order. It’s Adam Smith’s Great Society or Karl Popper’s Open Society. In Hayek’s conception of the social division of knowledge, this appears because individuals and organizations follow rules, which allow them to make use of their entire knowledge regarding the particular aspects they deal with. Some of these rules are designed by man, that is, we speak of the rule of law, and others, such as morals and customs, appeared spontaneously. The spontaneous order called society is that which organizes individuals and organizations. Thus, forces appear beyond man’s control, which run the society, that is, the spontaneous order is manifest. In this process, the government is just an organization. This explains why governments’ attempts to run the economy have resulted in major failures. As an organization, the government has two purposes (Hayek, 1993, Vol. 1, p. 48). The first one is to provide some services that the spontaneous order does not adequately provide. For this, the government behaves like any other organization, using the resources at its disposal. The other purpose of the government is to ensure the enforcement of the rules of conduct, of the laws, on which the spontaneous order is based. The government should be the defender of the spontaneous order, fend off the attempts that would stand in its way, not try to stop it.

Very important outcomes such as language, property, law in general (rules), morals, money, price system are the result of human action, but not of human planning. All these means that have helped us progress in the production of well-being are results of the spontaneous order. Facilitating this order should be the guiding philosophy of governments, and for a period, which ended with the Great Depression of 1929-1933, it really was. However, once the sciences of nature, especially the sciences of physics, have succeeded, based on the data that nature provides, to establish certain evolution laws, based on which well-controlled laboratory experiments and perfect predictions can be made, the success of the society began to be seen as a result of the “conscious direction towards preconceived ends” (Barry, 1982).

The social sciences, among which economic science is a representative example, have illegitimately borrowed research methods in the field of physical science, although data in society and economy are not “given” to economists, historians, sociologists, etc. in the same way they are “given” to researchers in natural sciences (Hayek, 1943; Mises, 1957). Thus, it was easy for governments to believe they can replace the intelligence of spontaneous order (of the market, if we refer strictly to the economy) with the intelligence of an organization, a group of people.

The magnitude of the illusion could be seen after the governments’ attempts to run the economy failed, with extreme examples in centralized socialism. For the open minds, these failures were proof that, in the process of spontaneous order, the government is just an organization, which must understand well its goals within the society and must not try to direct the society toward goals set by it.

The lesson was not well received by those who believe that the state should perform distributive justice and whenever they came to power they used governments to alter the spontaneous order and “correct” its results. Over time, the state (i) limited private property, including through nationalization; (ii) promoted legal positivism; (iii) distorted the language emerged spontaneously by introducing new expressions necessary to protect social engineering, which, having not arisen naturally, needed an invented language, i.e. they generated the “need” for “political correctness”; (iv) distorted the system of relative prices through interventions in their setup; (v) distorted the relative wage system by the same mechanism; (vi) limited innovation-generating competition, inter alia by accepting “too big to fail” institutions; (vii) promoted constructivist rationalism whereby it created and exploited a dangerous discrepancy between what the public expects from science in general and especially from social sciences in solving socio-economic and environmental issues and what really stands in its/their power. I will stop at these examples, but the list is much longer.

At various times, the process described above has grown faster or slower, but the trend has been on the rise. By this extension of the role of the state, the division of knowledge has been altered. The amount of knowledge used in society has decreased, because the state has taken over the role of social groups and individuals who had the knowledge regarding particular circumstances. Because of this, the solutions identified were less informed and less adequate. After 2008, the tendency to strengthen the role of the state, especially with a view to reaching the illusory goal of performing distributive justice, has increased again, and it seems to be just beginning. Many people approve of the strengthening of this trend, not understanding that the problems they have are rather the result of an over-expansion of the state, partially exemplified by points (i) - (vii) above.

People are looking for solutions, and most have been misled and accept that they can come from the state’s greater involvement in the economy. The result is an alteration of democracy and, in particular, an increasing approval from a growing share of the public to annihilate liberalism. Lately, liberalism seems to have evaporated. In this way, we sink even deeper into the situation we want to get out of.

The higher the share of those who believe that solutions to today’s socio-economic problems can be designed and implemented by the state, completely at odds with its ability to do so compared to the market, the greater the disappointment with the state’s failure. This could also undermine the confidence in its functions that the society really needs: the provision of services that the market can provide inappropriately and the enforcement of laws. The consequences could be very serious.

Currently, the worldwide spread of COVID-19 infections has the potential to cause a new global recession. Under the already visible recessionary impact of the coronavirus spread, governments will step in to support the hardest hit industries. Given the expectations trap and the resulting pressure on the authorities, the possibility that, while helping, governments create other problems is not ruled out. Moreover, rent seekers will identify new opportunities, especially where laws are unclear, contradictory and biased.

However, it is unlikely that the global recession – if it emerges – will be followed by a renewed restriction of market freedom, as we have seen it happen on other occasions when economic hardship was severe, affecting almost all economic sectors in a large number of countries and resulting in massive job loss.

The recession that is likely to occur due to the spread of coronavirus will not be in the same class as the recessions naturally triggered by the corrections that markets make, as its source is not located in the sphere of markets. As a result, politicians would not have a specific reason to limit the freedom of markets, to show that they are “doing something” in this regard. In the same logic, in this specific case, a government could not oppose the constructivist rationalism to the rationalism of the spontaneous order to limit the freedom of markets. In this situation, a restriction of market freedom would not be of any electoral use and could not be justified in terms of market behaviour. The only instance in which, in this particular case, we might end up with the issue of limiting market freedom would be that in which circumstances would become so complex (and at the same time adverse or unfavourable) that economic behaviours would either become distorted (speculative behaviour, etc.) or be perceived by the public as distorted by markets to such an extent that it would become necessary for governments to “do something” about them.

This being said, it does not mean, however, that the tendency to limit the freedom of markets, which started virtually a century ago, to which I referred at the beginning of this article, will not continue, guided in particular by the constructivist rationalism, practiced on a new scale in the Western society after the 2008 crisis. Ultimately, this type of rationalism that guides the theoretical foundations of economic and social policies will show its limits, which will be seen especially in a reduction of the entrepreneurial spirit, productivity and economic growth rates. Once these limitations become apparent, the society will be prompted to act to resize governments to the dimensions it needs and will coerce them to focus on their well-defined role, to provide those services they can offer better than the market and to ensure compliance with laws as a way of underpinning spontaneous order. But until then, serious consequences could occur. Will we find the strength to awaken before long? 

References 

Barry, Norman (1982), “The Tradition of Spontaneous Order: A Bibliographical Essay”, https://oll.libertyfund.org/pages/the-tradition-of-spontaneous-order-a-bibliographical-essay-by-norman-barry (first appeared in the journal Literature of Liberty: A Review of Contemporary Liberal Thought, vol. no. 2, Summer 1982 published by the Cato Institute (1978-1979) and the Institute for Humane Studies (1980-1982)). 

Hayek, Friedrich ([1943], 1972), “The Facts of Social Sciences”, in Individualism and Economic Order, pp. 57-76, A Gateway Edition (first Published in Ethics, LIV, No. 1, October, pp. 1-13). 

Hayek, Friedrich (1993), Law, Legislation, and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy, Routledge. 

Mises, Ludwig (1957), Theory and History, Ludwig von Mises Institute, Auburn. 

Röpke, Wilhelm ([1937], 1963), Economics of the Free Society, Henry Regnery Company (first published in Austria in 1937, Die Lehre von der Wirtschaft, Julius Springer, Vienna).

 
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OEconomica No. 1, 2016