– April 22, 2020
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The names of economic historians Werner Troesken and Robert Higgs are not the first ones that pop to mind in the current crisis. They should be amongst the first. 

In the flurry of news items – many that contradict others – there are repeated efforts to incite governments to act aggressively to deal with the crisis. The problem is that many of these calls are made by individuals who reason in an “institutional vacuum.” Governments should do X or Y to deal with the crisis. Little consideration is given to whether governments are able to do X or Y (i.e. do they have the capacity). 

Even less consideration is given to whether we want governments to do X or Y! Yet, this is the most important thing we ought to consider. Tools granted to governments to do good things can also be used to do bad things if they provide sufficient private returns to political actors. The ability to use the tools in socially nefarious ways depends entirely on the constraints imposed on political actors. 

As such, it is entirely possible that what prevents politicians from acting decisively and positively with regards to a particular problem (e.g. COVID-19) is also what prevents them from doing things that could, on aggregate, make things worse.

This is where the work of Werner Troesken is crucially important. Troesken, in the underappreciated Pox of Liberty, explained why in the late 19th and early 20th centuries America was terribly ineffective at dealing with smallpox. The constitutional constraints imposed on American governments made it harder for local, state and federal governments to deploy public health measures to deal with infectious diseases like smallpox. Thus, Americans circa 1900 died in high proportions from smallpox when compared to Germans, Swedes, Canadians, Danes, Romanians and Norwegians. However, the same constraints that made Americans sicker from smallpox also made Americans richer. 

Indeed, those same constraints enshrined an exceptionally high level of property rights protections. As a result, the United States were significantly richer than the countries that did apply more heavy-handed control measures. The trade-off was that where states were stronger, they could also do things that reduced living standards on other dimensions (such as income). Constrained states could not act on the public health dimension but so it blocked the ability to do things that reduced material living standards. 

More importantly, the greater incomes of Americans also meant that they were better off in terms of dealing with other diseases such as typhoid fever and tuberculosis. Thus, the constrained American state made Americans sicker from smallpox, richer and less sick from tuberculosis and typhoid fever. The trade-off for being more resistant to smallpox was to sacrifice some income and face higher mortality risks from other diseases (mostly related to poverty). 

How do we disentangle these trade-offs? Hell, how do we even measure them in cases like the present COVID-19 outbreak? The full ramifications of what we are doing now will not materialize for a long time. The rush to “act now” may come with a heavy future cost that we fail to appreciate now. 

 This is where the work of Robert Higgs comes in handy. Higgs is known for a multiplicity of works, the most important of which is Crisis and Leviathan. The thesis Higgs advances is simple: crises are opportunities that politicians use to increase their purview, and what powers are obtained in crisis are not handed back in full later. This is what he called the “ratchet effect.” It suggests that there is an inherent force that will push governments to continually expand but not monotonically. Rather, they expand in a jagged staircase-like pattern. 

Higgs applied his work to wars mostly, but it applies equally well to public health crises. This can be seen with the flu pandemic of 1918. There are few datasets of institutional features pre-1950, but thanks to the efforts of cliometricians like Leandro Prados de la Escosura, we have a dataset of economic liberty for some OECD countries between 1850 and today. To see if Higgs’ idea can be applied to public health crises, this dataset is ideal. In the table below, I used the average value of economic liberty between 1921 and 1929 (just before the Great Depression) and checked how much it had changed relative to the pre-war year of 1913 (the last full year of peace). 

Then, I regressed that change on the intensity of the war damages (i.e. war death rates) and the intensity of the flu pandemic (i.e. excess flu death rates). Obviously, these results have to be taken with a grain of salt (the sample is quite small). Nevertheless, they are supportive of Higgs’ thesis: both the Great War and the pandemic reduced the scope of economic liberty (i.e. governments grew). 

Table 1: Ratchet Effect from 1918 Pandemic

(1)
VARIABLESEconomic Liberty Index
War Death Rates, per 1000-3.704***
(1.231)
Flu Death Rates, per 1000-3.740**
(1.584)
Constant-0.691
(4.732)
Observations19
R-squared0.482

Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

You can easily see how Troesken and Higgs can be tied. On the one hand, Higgs shows how political actors have a tendency to desire greater powers. They will tend to use opportunities that present themselves in order to do so. Thus, they become less constrained. This, as Troesken shows, comes at a cost in the form of lower living standards on other dimensions of human welfare. 

The present situation is deeply worrisome as there is so much uncertainty regarding the features of the disease, its propagation and its deadliness. I am quite uncertain about what the proper response should be, which is precisely why we need to decentralize decision making. What I do know is that we cannot reason in an institutional vacuum. If we alter the constraints and powers of political actors as a result of reasoning in an institutional vacuum, we may be giving to political actors things they wanted regardless of the crisis. In the long-run, it will come at a cost. 

Vincent Geloso

Vincent Geloso, senior fellow at AIER, is an assistant professor of economics at King’s University College. He obtained a PhD in Economic History from the London School of Economics.

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