The Economics of Panics and the Real Source of Wealth
Article from For Liberty by Norm Leahy.
The coronavirus outbreak has caused substantial disruptions in financial markets – effects that are very likely to spread to the wider, so-called “real economy.”
Prof. Don Boudreaux has some thoughts on what he thinks are the top takeaways from the “panic.” On his list: the power of fear…
Unusual levels of uncertainty fuel unusually intense fear. And the more uncertain and fearful people are, the more they focus only on the immediate here and now. Tomorrow and the long run are ignored; all eyes, ears, and brainpower are trained on today and the short run.
This reaction is understandable, for it surely served our ancestors well. If you and your family discover that you’re surrounded by a pack of hungry wolves, surviving the present is all-important. Intellectual and physical resources should in their entirety be devoted to the effort to escape immediate annihilation. Under such circumstances, to coolly plan for the extended long run is suicidal.
But this human response typically makes for very bad government policy. Except for extreme situations in which all of humanity, or a sizeable chunk of the population of a nation, truly faces the prospect of being killed within a matter of days, society will survive indefinitely – until well past tomorrow. And so policies designed with only today in mind will make the lives and economic well-being of people worse over the long run.
But so long as it looks like we’re busy doing something – anything – right now, then all is forgiven. There’s one more big takeaway Boudreaux sees:
Our wealth, in the end, isn’t the amount of cash we have stuffed into our purses or deposited in our banks. Nor is it the number of numerals to the left of the decimal point in our 529 plans and 401(k)s. Ultimately, our wealth consists chiefly in the ongoing willingness and ability of millions of strangers to work for us daily. Any obstacle to large numbers of people performing their daily jobs means hardship for us all.
Fully functioning markets that produce the goods and services people want and need are resilient – they can absorb and adapt to many sorts of external shocks. But they are not invincible – either to prolonged government interference, natural disaster, or a microscopic virus.
We will get past the current disruption. The challenge will be making sure the markets that gave us such prosperity are restored to health as well.
Image Credit: By Jericho [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons