INSIGHTS: THE END OF CIVILIZATION?
Guest Columnists: LLewellyn H. Rockwell, Jr., Founder and Chairman of the Mises Institute. Reprinted with permission.
Governments all over the world are using the alleged threat of a COVID-19 pandemic to shut down the world’s economy. Daniel Lacalle, an authority on energy economics, writes: “The decision to shut down air travel and close all nonessential businesses is now a reality in major global economies. The United States has banned all European flights as Italy enters a complete lockdown, Spain declares a state of emergency, and France closes all nonessential public places and businesses.”
Further, he points out, governments can’t solve the problems they have created through massive spending programs and bigger deficits. These policies make things worse: “Governments will implement large demand-side policies that are the wrong answer to a shutdown of the economy. Most businesses will suffer from the collapse in sales and subsequent working capital build, and none of that will be solved with deficit spending. You cannot mitigate a supply shock with demand policies, which increase debt and overcapacity in the already indebted and bloated sectors and do not help the sectors that are suffering an abrupt collapse in activity.” And government printing of money, i.e., outright inflationism, is even more dangerous.
Lacalle’s remarks bring to mind the trenchant comments on Ludwig von Mises. He warns against attempts to shore up disastrous policies by printing more money. Mises says, “No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves.” He tells us where a policy of inflationism will end: “Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.”
Bill Sardi emphasizes the criminal folly of US government policy. The federal government, he says, is “willing to crash the economy, kill businesses, particularly churches and restaurants that are unlikely to have the resources to re-open their establishments, and coerce people to stay indoors, a practice that will further lower vitamin D levels and result in widespread infection and death among retirees.” States and cities have rushed to follow suit. Los Angeles and San Francisco, for example, are now under drastic “shelter-in-place” orders that require “non-essential businesses” to close and forbid dining in restaurants.
To understand more fully what is happening, we need the guidance of two great thinkers, Ludwig von Mises and Murray Rothbard. They teach us a vital lesson. Civilization depends on the international division of labor. To destroy the division of labor would plunge us into chaos. Life as we know cannot survive under a system of economic autarky.
Rothbard explains this key principle in “Freedom, Inequality, Primitivism, and the Division of Labor:” No one can fully develop his powers in any direction without engaging in specialization. The primitive tribesman or peasant, bound to an endless round of different tasks in order to maintain himself, could have no time or resources available to pursue any particular interest to the full. He had no room to specialize, to develop whatever field he was best at or in which he was most interested. Two hundred years ago, Adam Smith pointed out that the developing division of labor is a key to the advance of any economy above the most primitive level. A necessary condition for any sort of developed economy, the division of labor is also requisite to the development of any sort of civilized society. The philosopher, the scientist, the builder, the merchant — none could develop these skills or functions if he had had no scope for specialization. Furthermore, no individual who does not live in a society enjoying a wide range of division of labor can possibly employ his powers to the fullest. He cannot concentrate his powers in a field or discipline and advance that discipline and his own mental faculties. Without the opportunity to specialize in whatever he can do best, no person can develop his powers to the full; no man, then, could be fully human.
While a continuing and advancing division of labor is needed for a developed economy and society, the extent of such development at any given time limits the degree of specialization that any given economy can have. There is, therefore, no room for a physicist or a computer engineer on a primitive island; these skills would be premature within the context of that existing economy. As Adam Smith put it, ‘the division of labor is limited by the extent of the market.’ Economic and social development is therefore a mutually reinforcing process: the development of the market permits a wider division of labor, which in turn enables of further extension of the market.”
Mises writes along the same lines: “The fundamental social phenomenon is the division of labor and its counterpart human cooperation. Experience teaches man that cooperative action is more efficient and productive than isolated action of self-sufficient individuals. The natural conditions determining man’s life and effort are such that the division of labor increases output per unit of labor expended.” The division of labor, Mises tells us, is the key to the development of civilization. He says, “We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants.”
Now, governments all over the world want us to give this up. Abandoning the international division of labor will hit Africa, dependent on trade for bare survival, especially hard. To what end is the world’s carefully wrought economic system being dismantled? Does the spread of COVID-19 require us to destroy the world’s economy? Here we can learn from another outstanding thinker, Ron Paul, who is a medical doctor and can give an expert analysis of government medical propaganda. He says: “On Face the Nation, [Dr. Anthony] Fauci did his best to further damage an already tanking economy by stating, ‘Right now, personally, myself, I wouldn’t go to a restaurant.’ He has pushed for closing the entire country down for 14 days.
Over what? A virus that has thus far killed just over 5,000 worldwide and less than 100 in the United States? By contrast, tuberculosis, an old disease not much discussed these days, killed nearly 1.6 million people in 2017. Where’s the panic over this?
If anything, what people like Fauci and the other fearmongers are demanding will likely make the disease worse. The martial law they dream about will leave people hunkered down inside their homes instead of going outdoors or to the beach where the sunshine and fresh air would help boost immunity. The panic produced by these fearmongers is likely helping spread the disease, as massive crowds rush into Walmart and Costco for that last roll of toilet paper.” Ben Swann supports Ron Paul’s skepticism with a careful analysis of World Health organization statistics in this important video
Even if the COVOID-19 virus turns out to be more severe than the skeptics give us reason to think it is, we can get through it. We cannot survive the end of the division of labor. It would be the finish of civilization as we know it.
ON THE ECONOMY: KUNG FU FIGHTING
John Dunham, Managing Partner, John Dunham & Associates
Everybody was Kung Fu fighting. Those kids were fast as lightning. In fact, it was a little bit frightening, but they fought with expert timing. So goes the chorus of the 1974 disco hit written and performed by Carl Douglas. This song, which was at first supposed to be a B-side, ended up being rated number 100 in VH1’s 100 Greatest one-hit wonders, and number 1 in the UK Channel 4’s Top 10 One Hit Wonders list in 2000.
It amazes my how quickly people can start to make jokes about tragedy. Supposedly, a White House official coined the term Kung-Flu for the COVID-19 virus that is the cause of the current pandemic and economic shutdown. With a lot of time on their hands, those that post on social media are creating Internet memes like a cake shaped like a roll of toilet paper, or the internet post that read Prediction: There will be a minor baby boom in 9 months, and then in 2033 we shall witness the rise of The Quaranteens. I had to laugh at a video of somebody Roomba curling, and a Where’s Waldo Coronavirus Edition book where Waldo was the only person on the beach.
Our current blog post (Don’t Worry, Be Happy) examines some of the reasons why we probably should not be panicking about the end of the world. This is not the year 541, and the COVID-19 flu is not the Plague of Justinian, however, the measures being undertaken to stop its spread will certainly have some serious economic consequences. In fact, from the perspective of an economist, the forced shutdown of most of the economy is an extraordinarily costly way to deal with the pandemic.
I have been asked to forecast the costs of the shutdown, and to be honest, its very difficult to say exactly how this will damage the economy. There are some things that are almost certain. One is that over the next month or two, unemployment will rise to levels not seen since at least the double recession of the early 1980s, when about 11 percent of the workforce was jobless. If things continue as they are, it is likely that the jobless rate could increase to around 13 percent.
How the overall economy is impacted will be is almost anybody’s guess. The economy will certainly be in recession, with economic activity likely declining in the first quarter, and as things look today, probably in the second as well. Bank economists are particularly pessimistic, with those at Morgan Stanley suggesting that GDP could fall by more than 30 percent in the second quarter and those at Bank of America suggesting that there could be a 25 percent decrease. James Bullard, president of the Federal Reserve Bank of St. Louis, was even more bearish, suggesting that GDP could plummet 50 percent.
These are up to double the losses that the economy experienced during the Great Depression. They are almost dystopian, and difficult to believe, but honestly, anybody’s guess is about as good as anyone else’s. What really matters is the length of time the economy is shut due to government fiat.
We do not believe that the impact will be as large as some financial economists are suggesting. To put things in perspective, this economic situation is self-imposed. It is not due to mass destruction (like an earthquake or Tsunami). It is not due to demographics or technological displacement, its not even due to the debt bubble (though this is impacting Wall Street.) Major recessions come about when the economy abruptly adjusts to new situations. The Depression came about when the economy shifted from agrarian to industrial, while the recessions of the 1970s and 1980s were due to the cost of war and deindustrialization. Even the financial crisis and recession of 2007 and 2008 came about because of a massive bubble of over supply in the real estate markets.
Recessions caused by sudden unexpected events are much shorter lasting, for example the brief recession that occurred following the 9-11 attacks, or even the steep but short recession following World War 2. It is more likely than not, that the COVID-19 recession will be steep and short, particularly if there is government regulatory help that allows the most impacted industries like hospitality and air travel, to avoid bankruptcies. If the lock downs are really short term (a few weeks or at most a month) there will likely be little lasting impact. Let’s face it, even if we are not sick, we could all use a break. Americans work 1,811 hours per year on average according to Pew, while on the other hand the average employee in France works just 1,473 hours per year according to the OECD. We could all probably use a couple of weeks off at home binge watching TV.
But while many upper- or middle-income workers can either work from home or simply take a break, the vast majority of Americans, 78 percent according to a 2017 survey by CareerBuilder, live paycheck to paycheck. Even among higher income workers (those making $100,000 or more annually) 10 percent live paycheck to paycheck. On top of that, 75 percent of working Americans are in debt, and only 25 percent save any money on a monthly basis.
All of this suggests that closing establishments, particularly those that employ huge numbers of people like retailers, hospitality venues, and passenger transportation firms, will have a large and substantial immediate impact on the bulk of the population. On top of that, many of the most impacted firms are small businesses that do not have the resources necessary to keep people on their payrolls with no cash coming in. Over 99 percent of America’s 28.7 million firms are small businesses.
These figures suggest that the effect of an economic shutdown lasting much longer than a couple of weeks will begin to grow at a faster and faster rate. Our best guess is that the March shutdown will drain any growth that has occurred in the economy in the 1st quarter, and we are likely to see first quarter GDP growth negative but close to zero. If the shutdowns drag on, the 2nd quarter could see GDP reductions approaching 13 or 14 percent.
If, like some politicians have suggested, the shut-downs last for the rest of the year, we could be looking at something resembling the fall of Rome, but it is likely that the equation would shift away from the virus and more toward the economy long before that happens. Some influential economic pundits, such as the Heritage Foundation’s Steven More, has suggested that the shutdowns cannot last more than three weeks, or else the damage will be so significant that the cure may be worse than the disease.
For now, the COVID-19 flu is raging through the population as fast as lightning, making it more than a little bit frightening. For the sake of those that become ill, and for the economy as a whole, let’s all hope that our medical professionals can fight it with expert timing.