Economic Theory in Time of Crisis

Ludwig von Mises remains in my judgment the greatest economic analyst of the 20th century. He was sharp and pointed, and yet comprehensive. His critique of socialism was decisive and his price theoretic rending of the manipulation of money and credit remains I would argue the top contender for an economic theory of macroeconomic volatility. 

There are other theories – psychological, random shocks, etc. – that can use economic tools in analyzing, but an economic explanation that traces from individual decision-making guided by relative prices to the pattern of exchange, production and distribution, and how distortions in that chain can result in coordination failure still belongs in my humble opinion to the class of theories that Mises pioneered. 

And, in developing both his systematic critique of socialism, and his analysis of the monetary system and the problems associated with the manipulation of money and credit, Mises would articulate a theory of the entrepreneurial market process that demands our theoretical respect and attention, and continued refinement and development. Mises, the economic theorist, remains scientifically relevant today if not more so than he was during his lifetime. His research program is a progressive one far from being exhausted.

On the other hand, Mises was also a broader intellectual – both a policy analyst and a social philosopher. I tend to pay attention to Mises the economic theorist and Mises the social philosopher of liberalism. I tend to find Hayek a more compelling social philosopher, and Hayek and Kirzner the most astute developers of Misesian economics. 

I realize these are all judgment calls that are a function of particular historical contexts and personal tastes, so I have no desire to debate these assessments. But what I do want to do is think some about Mises as a policy economist. This actually was a job he held throughout the formative period of his career. 

These writings can be found in the Richard Ebeling-edited 3-volume set of Mises’s “lost papers” – Selected Writings of Ludwig von Mises. I have been reading them closely lately for a variety of reasons. A different Mises emerges. The Mises that I have spent my career studying is the Mises of: “The market is not a place, a thing, or a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor.” Or, the Mises that told his readers that “I set out to be a reformer, but only became the historian of decline.”

But this policy advisor Mises argues that: “When there is a fire, it is paramount to utilize firemen, hoses, and water; how to pay the fire brigade is a secondary consideration at that point.” And, who argues that when it is an exogenous threat, “The favorable outcome of a war is not solely dependent on the number of soldiers, or the valor and brilliance of their military commanders. An equally important factor is the capacity to provide the army with supporting material, arms, and military equipment of every kind.”

We can debate a lot of things about our current situation, and historians and economists will do so. But there are two critical facts – first, this is not a bust generated by manipulation of money and credit. No doubt our financial institutions are vulnerable because of policy choices made over the last several decades, and these vulnerabilities are being revealed. The point is that this was not the impetus for this particular timing. And because of policies in place, capital and labor are not being allowed to be reallocated as they normally would in a time of adjustment. 

The self-corrective mechanism has been shut off by dictate, not just made more difficult or confusing but locked down by government dictate. In short, this downfall is a consequence of a government-mandated work stoppage due to a public health crisis. 

Second, the public health crisis is an exogenous shock, made worse by a host of government failures associated with preparedness and response. But those issues are now not relevant for discussion; they are the constraint against which next steps must be made. We can adjudicate guilt and innocence down the road, as historians no doubt will. 

This is also true about the debate over the statistics on this – of which you can have a serious conversation about optimistic readings and pessimistic readings – this I think will also be sorted out by the public health experts and epidemiologists in the coming years (I hope for optimistic reading). 

As economists, we are trained to think in terms of trade-offs, and so my attention is drawn to the reality of thinking through how we weigh the alternative paths forward that are effective at ending the public health crisis with policies that don’t destroy the economic future. So that is why I am turning to Mises – he had to think about these issues in the face of WWI, the Great Depression, and WWII, and during that period he didn’t just think, but he lived through the horrors of war, the loss of the world of yesterday in Vienna, and dislocation. So what he has to say might warrant our attention – not that it has direct answers to our world today, but to how a committed rationalist and liberal tries to reason through demented times.

It is not Mises the theorist and not Mises the philosopher, but Mises trying to take that theoretical perspective and apply it in a way consistent ultimately with his liberal philosophy to address the pressing issues of a demented time. We must, I would argue, do a similar thing in our time.

Tyler Cowen has a series of suggestions that can usefully frame the policy discussion. (https://econfip.org/policy-brief/plans-for-economic-mitigation-from-the-coronavirus/)

I would add my voice to those proposals, and just emphasize that there are immediate reforms we desperately need that would help by unleashing the creative powers of a free civilization:

• End all tariffs on goods needed to get through this;
• End the monopoly on disease testing and medical innovation;
• End the restrictions on hospitals and beds; 
• End laws against “price gouging” that have caused hoarding and shortages;
• Do everything possible to open the economy up again while maintaining public safety. 

And most of all, this must be done in a manner that doesn’t unleash in an uncontrollable manner what Robert Higgs aptly describes in Crisis and Leviathan as the “ratchet effect” that ultimately would threaten our ability to tap into those creative powers by curtailing our freedoms.

Related Articles – Crisis