One of the numerous ways I have occupied myself during the lockdown (and in NoVA we are not yet even in Phase 1) has been joining each week the webinars on The Economic Implications of Covid-19 hosted by Professor Markus Brunnermeier, the Director of Princeton’s Bendheim Center for Finance. The lineup has been impressive, and the information I have been able to gather from the different speakers has been vital to my own efforts to puzzle through the current situation.
It is not that I agree with the analysis always presented, but I get to appreciate how careful some thinkers are (e.g., Angus Deaton) and how politicized others have become (e.g., Joseph Stiglitz and Paul Krugman). It also has been eye-opening how given what I already knew prior to the seminar about the general perspective and approach of these famous speakers, that I could guess what they would have to say.
Very little genuine surprise has accompanied my attendance. Deaton’s careful and humble presentation sticks in my head, Daron Acemoglu’s recalibration of the SIR model to attempt to account for human behavior and heterogeneity of the population, and John Cochrane’s straightforward and bold comparison of a “dumb” re-opening with a “smart” shutdown was as brilliant as it was counterintuitive to the conventional wisdom.
The videos and Power Points are all available at the link above and I recommend everyone to look carefully at this material. You will learn a lot. Let me be clear, you will learn a lot even from those you significantly disagree with because these folks are smart, well-considered, analytically astute, and know how to make serious and professionally responsible arguments.
The most recent one, as I write, was by Larry Summers. Now, I have to admit a few things before I share my objections to his presentation. First, Summers, as all these famous economists are, is off the charts smart. None of these folks are bumbling. They are quick, high-powered analytical minds. So, #1 wicked smart. Second, Summers has more experience in serious public policymaking and in times of crisis than perhaps any other economist in the world – with perhaps the exception of Ben Bernanke. So, #2 experienced. Third, his smarts and his experience make him both supremely confident in his observations and conclusions. So, #3 strong voice.
Bottom line, who am I – a bumbling professor who has never held any policy position – to raise concerns over the observations and conclusions of Larry Summers? Well, it would be wise to first state what I think he is arguing so you can check that against listening to his talk, and then I can say what I think is most objectionable.
Summers argues that the trends prior to COVID-19, due to the changing costs associated with delivery of health care, education, and governmental services in general were rising relative to the past. He invokes an idea developed by the late economist William Baumol labeled the “cost disease.” He is not the first to make this argument; my colleague at GMU, Tyler Cowen has made this argument for well over a decade, though I think there is a secret more subversive meaning involved in Cowen’s presentation. The cost disease idea follows from the observation that the productivity of certain types of labor – a nurse’s care for her patient; a professor’s classroom lecture; a judge’s deliberation over a case – has not radically improved over the centuries. But there have been productivity increases in other sectors throughout the economic system.
As a result, in order to bid for the labor talents of individuals in nursing, professing, and judging, their wages become divorced from their productivity in a way that classical economic theory would not predict. This drives up labor costs for those services.
The old conventional wisdom was that the only way to increase real income is to increase real productivity, and increases in real productivity are a function of improvements in human capital, improvements in physical capital, and improvements in the rules that govern the interaction between physical capital and human capital. Baumol’s cost disease throws this conventional wisdom into question.
But health care requires nurses, education requires professors, and law and order requires judges – so each sector is getting more expensive as economic progress is taking place. This is a recipe for more and more government involvement in those industries to help offset the costs, whereas a commercial enterprise would prove unviable in addressing those rising costs of doing business. In Summers’ presentation this is used to suggest to his audience that the economic forces at work in a modern economy are pushing toward a larger role for government. Note, his argument is that this is due not to a shift in ideology, but a shift in relative prices. In short, it is inevitable according to Summers that the government in the future will be bigger in scale and scope than at an earlier time.
In addition, Summers argues that as a society the polity has made the decision that government is responsible for righting the wrongs associated with inequality and historical injustice, and securing the dignity of individuals in old age. These two democratic decisions also reinforce the tendency of the economic forces to lead to bigger, and he argues, more centralized, government.
Only a large centralized government can address across the board the issues in health, education and justice in a manner that adequately manages the correction of inequity and provide protection against the vagaries of old age. Education, Summers argues, is of course one of the great social levelers that society must invest in, just as basic R&D expenditures must be increased to continually fuel the productivity increases that are possible through technological innovation.
According to Summers, COVID-19 has simply reinforced all these natural tendencies toward a bigger and more centralized state in both scale and scope. In his talk he argues we do not have to worry about fiscal irresponsibility because at the moment interest rates are so low we can borrow without concern, and we can be aggressive in monetary policy without worrying about a flight from the dollar because there is no viable alternative currencies to attract investors – the alternatives are either economies that are old-age homes (Europe and Japan) or jails (China), and cryptocurrencies are not, in his opinion, capable of serving the function of the international reserve currency.
Again, in his mind, the logic of contemporary affairs will be higher taxes (including a wealth tax) and more regulation (including breaking up the large corporations), though he would like to see trade and immigration, and an increase in international cooperation to deal with climate change, etc.
The Summers vision of the future as an inevitable march toward bigger and more centralized control echoes calls in the 1920s and 1930s by the men of science that compelled Hayek to put pen to paper to challenge in both The Road to Serfdom (1944) and The Counter-Revolution of Science (1952). The men of science today, as represented by Summers, have never taken the Hayekian lesson all that seriously. They are not concerned with “the pretense of knowledge” and practice “the fatal conceit” on a daily basis. The sort of concerns raised by Adam Smith, or Frank Knight, or Hayek, just do not resonate with the contemporary trained elite in the economics profession.
Today amidst the public health crisis of the pandemic, they justify the demands for a larger and more centralized government to fight against a significant externality and thus argue that a unified national and in fact international response represents a quintessential global public good. The problem is that they simultaneously hold that mankind cannot be trusted to act on its own and in local situations to adapt and adjust to the risk factors that they individually may face, and devise a multiplicity of mitigating solutions as purposive human actors, in families, and within communities, and yet the argument is made that mankind can be trusted to obey and rely on the expertise of scientific elites from afar to cooperate with one another across the globe to develop the effective solution and implement that solution in a timely and equitable fashion. Anyone see the problem? Furthermore, is there a clearer example of the call for the technocratic elite to govern over society, rather than be citizens engaged in governing with other citizens within a democratic self-governing society.
The way Summers set up his argument – starting with the inevitable trends and then augmenting that trend with the shock of a crisis – would seem to suggest that he is telling his audience that resistance to big government, resistance to centralized government, resistance to more intrusive government, is futile. Trust the experts, obey the anointed authorities, and better days ahead are promised.
However much you may want to resist this trend toward centralization of governing authority, it is happening because of the natural economic forces at work in the modern world push inexorably in that direction, and because of the moral imperatives of dignity and justice for all, and because of the existential threats we face from a global pandemic, from climate change, from the intricate but fragile world financial system, from other hostile enemies all lead to a increasing demand for larger and more centralized government. Catastrophe looms ever present in the background and we must be prepared. Who could possibly want to be ill-prepared and caught off guard when the enemy strikes?
Nobody. But the question I believe Summers is begging is whether a behemoth bureaucracy can outperform a more nimble and entrepreneurial alternative institutional arrangement for governance and wrestle with the social ills that may present a challenge to a liberal democratic society – whether small or large. I would argue that if the answer to that question – which is both an analytical and empirical one – is that a polycentric system of democratic self-governance would provide a more responsive system that is capable of continuous learning from the variation in social experiments it necessarily produces, then resistance to centralization isn’t futile at all, but necessary. We must not concede the inevitability argument to Summers, but instead insist on the importance of ideas and of the choice individuals have as responsible citizens over the rules and structures that govern their society.
The argument for a society of free and responsible individuals must be made anew each generation and affirmed in the hearts and minds of the citizenry far more than written down on parchment and repeated with no commitment in faithless pledges of politics. Those sorts of constitutions are about as worthless as the paper on which they are written. In that world, constitutions would only be allowed to pinch when it was convenient, and they could bend and break at the first sign of inconvenience.
Principles of good governance fade, and the politics of expediency dominate the moment. That, I would argue, is the inevitability that Summers is picking up on and running with. The sort of economics that informs his “mental model” and thus his call to action, is economics as a tool of social control. Carl Menger, and then Ludwig von Mises, referred to this sort of economics as the economics of Prussian police science. A critical consequence of this governing mental model is that it does not permit for the sort of disruptive entrepreneurial innovation that not only radically changes the worlds of goods and services, but also the very structures of governance in how we interact with one another and with nature. Relative price adjustments can result from exogenous shocks, and guide actions, or they can result from endogenous changes in demand and from entrepreneurial alertness to opportunities presented by changing circumstances. Systems of governance that negatively impact the ability of individuals to act to bring about change both within a given governance system, and of that governance system are going to fail to be vibrant and creative societies.
Unfortunately, and especially given the great trauma of the 20th century that followed from strong centralized control of economic and political life, it is still a sad reality that the way economists reason is more consistent with the Prussian police science rather than a science more attuned to the demands of a complex, dynamic, creative, evolving, and democratic society. When economists from their perch as members of the technocratic elite offer advice as if to a benevolent social planner, they are committing the fundamental “error of constructivism” that Hayek warned undermined the operation of a society of free and responsible individuals. It is, Hayek argued in his Nobel Prize lecture “The Pretense of Knowledge”, what threatens to turn economists into potential tyrants over their fellow citizens, and destroyers of the very civilization from which they have benefitted so much.
Resistance isn’t futile; it is necessary, if we have any hope to hold as an ideal a free and democratic society which exhibits neither a system of privileges to a select few, nor domination of the many by that select few who assume the role of governing over their fellow citizens. Resistance is a necessary part of democratic self-governance, and it becomes even more so at a time when all the calls are for increased centralization and the voices of the technocratic elite grow louder and stronger in insisting that such resistance is futile.