Mises Daily Articles
In a Crisis, Markets More than Ever
This talk was delivered at the Mises Institute’s Supporters Summit on Radical Scholarship: the Guerrilla Movement for Liberty, on October 15, 2004, in San Mateo, California.
You can learn so much about human nature, the workings of society, and the functioning of markets by looking at the aftermath of a natural disaster. It is a fascinating laboratory for observing how society functions under the worst conditions.
If you have ever been through a natural disaster, and paid attention to how the preparation and clean-up takes place, you know precisely what I am referring to: the splendid creative power of human energy to cooperate to overcome the most astonishing barriers.
Such settings can teach us so much about politics and economics. If society can function in these radically abnormal settings, if markets can work well, we discover so much about the power of the same forces and institutions to manage under normal conditions.
Florida has been through four hurricanes this year, and the damage has been overwhelming. Contrary to what you read in various newspapers, this destruction is not a good thing for the Florida economy. For people who have read Bastiat's story of the boy with the rock, as told by Henry Hazlitt in his book Economics in One Lesson, we marvel at how people still haven't learned the lesson. In the midst of destruction, someone will always raise a voice to defend the view that the destruction has a wonderful upside, that the rebuilding will stimulate rebuilding.
My favorite example this season comes from USA Today. The headline read: "Economic Growth From Hurricanes Could Outweigh Costs" (September 27, 2004). The story read as follows: "Economists tallying the numbers expect the hurricanes will be neutral in their effect on the U.S. economy, or may even give it a slight boost, particularly because of an expected reconstruction boom in the already red-hot construction industry."
Then comes the inevitable quotation from a naïve economist, who pretends to have highly specialized if counterintuitive knowledge: "It's a perverse thing," said Steve Cochrane of Economy.com. "But from an economic point of view, it is a plus."
Tell you what: let's not put Mr. Cochrane in charge of national economy policy. We might find man-made disasters hitting all of our communities in order to help us. Maybe instead of sending all those bombs overseas, they could be dropped right here at home, so as to spur a massive rebuilding boom. It's a perverse thing, he might say, but it's for our own good.
If you understand why people believe that, you can understand why there exists something called Keynesian economics, which postulates that everyone can be made better off by letting the government rob people and give money to bureaucracies to spend. You can also understand how it is that people cheer on inflation and taxation as productive devices. You can see why so many are still under the impression that war is an economic stimulus, and that Iraq will somehow be better off with billions in reconstruction spending rather than by not having had their towns and cities blown up in the first place.
In short, if you can understand why people celebrate a hurricane's productive power, then you can understand how it is that people think that Leviathan as we know it today is an institution to celebrate and adore, and why we should build on its marvelous successes like Social Security, public schooling, the war on drugs, and the war on terror. These same people should also celebrate other institutions such as crime waves for their productive power. After all, when people have things looted from them, they must then go out and buy more things, which stimulates more production and so on.
Conversely, if we are to realize that hurricanes are, after all, not a good thing for Florida or anywhere else, we have taken the first step toward seeing what is wrong with all forms of what Mises called destructivism. This is the ideology that sees some merit in undoing, demolishing, reversing, or hobbling the march of human enterprise. Who would favor such an ideology? Many of the same people who think hurricanes and wars are good for us.
At first, destructivism would seem perverse and easy to refute. In fact, destructivism has a hold on the public mind. It was unleashed in the 20th century and it continues to play a huge role in public affairs today. It is the ideology that celebrates confiscatory taxation, punishing regulation, aggressive war, and the daily acts of public administration that destroy wealth.
Natural disasters are something human society has to cope with, and the market has found brilliant ways of doing so. Government, on the other hand, is a man-made disaster that is sustained only by the ideological ignorance of the population that somehow believes that because destruction is officially sponsored by the law and the legislators, or otherwise endorsed by the democratic process, that it yields great good or forestalls great evil.
In the same way that society has learned to deal with natural disasters, and this is part of the miracle of human creativity I will address, we have also learned how to deal with the persistent presence of government, in ways that have surprised government's biggest critics.
But let us begin with the time before the natural disaster to see how the market handles these settings. Long before the storm appears in the high seas, the market institution of insurance has assessed the risk and offered to bear that risk for people at a price.
Homeowners with a mortgage are required to insure their houses, and insurance companies must make an assessment of the risk associated with the location and the likelihood of disaster. If the risk is high, the premiums are high too, and so people will not build there. The homeowner himself does not need to know the risks; that information is conveyed in the price, and he responds accordingly.
Of course, the presence of government-provided insurance foils this market system and ends up creating hazards, which is exactly what federal flood insurance (created in 1968) does. It subverts the market process and encourages irrational decision-making. This is the only reason that people in large numbers build on flood plains and islands that are ripe targets for hurricanes. Nonetheless, the operation of the private insurance market does the bulk of the work to guide rational building patterns.
When the news appears that a hurricane is coming, the first reaction of the population is to stock up on provisions, and who is there to provide but private enterprise. Indeed, we take it all for granted. It is not government or bureaucracies that make available many days in advance such items as dry goods, batteries, flashlights, water, generators, and all the rest. It is the free market, and, yes, these firms make money in the process, by providing a service people want.
So plentiful were bottled water and canned tuna and batteries in Auburn the week before Ivan, that panic buying subsided very rapidly. It dawned on people that a dozen stores were going to have plenty available for everyone. Order came about because consumer expectations fell in line with resource supply. People were calm not because government told them to be or because they believed that public authorities would care for them. Rather, people had confidence that private enterprise would supply what people demanded, regardless of the conditions.
When the hurricane actually hit, government offices were closed but Wal-Mart and Lowe’s and Kroger remained open throughout, with vast quantities of extra provisions on hand. When it became clear that the hurricane had passed, restaurants opened within minutes. Tree cutting services were everywhere. Handymen were hawking their wares.
The main concern of everyone is electricity, a service provided not by private enterprise, but by a monopoly under the supervision of government. For some reason, everyone knows that power goes out in a storm. The providers know this too. The consumers do too, and so does the press. Everyone lives with it. No one questions it. The wind blows, the rain comes, the lights go out, and we wait until regulators deign to turn us back on.
Imagine such a service as provided purely by private enterprise. Surely the first order of business would be to create an energy flow that managed to stay on during an emergency. The problem would be overcome by entrepreneurs and capitalists, chiefly because the consumer is king. With electricity, however, we all just accept the fact that it goes down in a storm and we must wait for the bureaucracy to supervise its turning on.
When private enterprise fails, we don't hesitate to complain, demand, and even sue. But when government fails at its most essential duty of keeping the lights on, most people don't even bother to complain. I should add that this is a very serious matter, one that often involves life and death.
Electricity is a common example of what used to be considered a public good, one that private enterprise, it was said, could not provide or for which competition would be wasteful. Of course we now know this claim to be ridiculous—just look what private enterprise has done with cell and wireless technology—and that the main barriers to reliable energy provision are the government monopolies that keep private enterprise out.
Nonetheless, private enterprise has done its best to get around the restrictions. Large stores like Home Depot are fully prepared with enough private generators to power their stores, and home generators are ever more common.
As a side note, it is certainly true the Post Office will do everything possible to deliver your mail in a storm, or at least we have developed a general expectation that the service will not be dramatically worse in a storm than it is while the sun is shining. Perhaps that is not saying much. But I'm sure you are relieved to know that, no matter what the weather, the government can get to you to deliver a message.
You will notice that natural disasters tend to be far less deadly in wealthy, capitalist countries than in poor socialist ones. The press invariably attributes this to building codes, as if socialists had never thought of that. Now, nothing strikes me as more absurd than the assumption that only government cares if your own house can withstand an earthquake or tornado. The people who live there, the banks, the insurers, the builders—none of them have any interest in solid construction and so the regulators have to be involved. That's the theory anyway, and it is ridiculous.
Moving on in the parade of folly, let me say a few words about price gouging. Nowadays, every state and most towns have strict rules against raising prices to too great an extent during a storm. This shuts down an important rationing mechanism when it is needed most, and also prevents the market economy from signaling consumers concerning dramatic shifts in the relative value of available resources and services.
In saying this, I have no doubt that there are unscrupulous people out there waiting to exploit a human emergency to make vast sums of money. And yet, this is a far better option than what is the actual choice: not cheaper service but no service at all. I assume that everyone would prefer the option of a high price, whether or not you buy, to no good or service at all. A temporarily high price also serves the function of signaling other entrepreneurs and capitalists about market disequilibria. It permits a faster market clearing.
There are few things as disgusting as prosecutions of gouging cases. The owner of a gas station, believing that he might be able to sell gas for $5 per gallon, for however brief a time, will risk life and limb to get to his shop to open it for travelers. That is his passion and vocation. Take him to jail for engaging in voluntary exchange and you have violated a human right. Tell that same person that he is notpermitted to sell at a higher price, and there will be no gas available. That is our choice: what some people call gouging—or no goods and services. Government, as we know from the case of electricity, prefers the latter.
Another way in which government prevents people from responding rationally to a crisis is through mandatory evacuation orders, premised on the idea that government officials know what is better for you than you know yourself. In the aftermath of one of these orders, the newspapers are always shocked to see that some people might have taken advantage of the evacuation, stayed behind, and helped themselves to the property of others. I suppose nobody in government had really thought about the message that a mandatory enforced evacuation sends to criminals: something along the lines of COME AND GET IT!
A regulation that Murray Rothbard found to be particularly egregious is that which prevents people from returning to the homes after a natural disaster. It is particularly cruel because immediately following the storm is when the real wonders of human cooperation come into play. Every resident from the smallest renter to the owner of the largest landed estate examines the space outside his or her door and assesses what needs to be done. There is no expectation that someone else should be responsible for it. The locus of control and responsibility is clearly defined. Mother nature acted, but it is property owners who must respond. And so they do, starting with what is theirs. But it does not stop there. We also help our neighbors in need. Anyone with a chainsaw gets busy, starting again with his own property and extending services out to neighbors. Heroic efforts take place all across the community, the town, the county, and the state.
Private enterprise is there too, with building materials, tree cutting services, plumbers, and repair services of all sorts. If it is something you need or want, it is available. One by one, hour by hour, the damaged area is cleaned up, at least that part of it that is privately owned. If you have gone through this in the past, it is truly a marvel to behold the power and productivity of thousands and tens of thousands of people caring for their own and helping out neighbors. In my own observation, it seems to take less than a day to do more than half the clean up. What we observe in these cases is not just the free market at work but the whole workings of human society, people cooperating commercially and charitably toward their mutual betterment.
What we see in this case is something that nearly all the social science literature claims cannot happen. The economists doubt that prices and wages can respond quickly enough to re-equilibrate supply and demand according to new conditions. Not only do we see this happening in real life; we actually observe private enterprise attempting to anticipate change that is coming and be prepared before it happens. And keep in mind that this is true during times of emergency and crisis, not just during normal times. Contrary to the claims of social democrats from time immemorial, that markets are fine from day to day but not during exceptional events, we find that markets love nothing more than a challenge that offers a profit opportunity. Where government sees only devastation, markets see possibility.
We see this happen in war-torn areas, where the merchant class struggles against impossible odds to provide. We see this in American cities with areas so violent that most people would try desperately to avoid even driving through. But the merchant class sees a chance for providing a service, and so risks life and limb. All over the world where the risks are high and the barriers seemingly insurmountable, we see private enterprise providing and serving others. This is true of the smallest peasant money changer to the largest multinational corporation. Commerce does what others are unwilling to do. And it is hardly ever given credit.
But we should not single out commerce as a special case within society. It is the conviction of the liberal intellectual tradition dating back to the Middle Ages that society contains within itself the capacity for internal self-management. This is in contrast to the claims of the sociology literature, which posits that human society is riddled with conflict between groups: races, ages, ethnicities, and abilities. The sociologists have sliced and diced the human population to such an extent that it would seem impossible for anyone to get along at all, and certainly not in times of emergency.
But a natural disaster shows precisely the opposite, that there are many paths to human cooperation. It can take commercial forms or it can take the form of charity, and within each of those we see thousands of variations of forms. In the end, society works to accomplish amazing things by bringing together the individual efforts of every person and property owner, and it does it all without central command or coordination.
Let's return to the scene of the hurricane. Within a week after a natural disaster, we find that most places have restored normalcy and order and even beauty. All that is left to do involves plantings and more fundamental building projects of various sorts. But the settings have been fully prepared. The recovery is well on its way. This is the great surprise that greets us in the aftermath of the storm. People love to brag and talk and go on about all the horrors created by natural disasters, but the truly marvelous and newsworthy thing is not the disaster but the wonderful manner in which it is repaired: by voluntary human effort.
The public parks, the school grounds, and the land claimed by the state is usually cleaned up in far longer time. But these days this is for a reason that goes beyond the usual bureaucratic incompetence. Every community seeks disaster assistance, money that usually ends up in the hands of local governments where officials pass it out to their friends. The newspapers cooperate in this creation of phony disasters in the hope of getting big bucks from the likes of the Federal Emergency Management Agency.
The morning after Ivan, our local paper headline in massive type: DEVASTATION. It showed a picture of a man carrying sticks across his lawn, an awning from a burger joint flipped up due to wind, and a tree that had tipped over onto someone's porch. This was not exactly the kind of devastation that would take hundreds of millions of taxpayer dollars to fix. But everyone knows that after the storm, all official institutions have to play up damage as much as possible in order to gain the attention of federal authorities.
The whole enterprise of disaster aid has become one of the great rackets of modern government. Today we have the disgusting spectacle of senators and presidents coming to visit weather-injured places, as if they have within their capacity the ability to size up damage and make provisions for making it all correct. We are supposed to believe that they know more about the proper course of action than insurance adjustors and property owners.
If we had honest politicians, they would say: "Of course I'm sorry about what happened to that beach in Florida, but my presence there would only distract from the essential work being done by owners and their insurers. I don’t know anything about the topic, and even if I did, I would not want to steal from some to give to others to realize my political priorities."
I'm reminded of the classic story of how Congressmen Davey Crockett was denounced by a constituent for having voted to pay for the rebuilding of Georgetown after a fire. He never did it again. These days, I suppose, we would be grateful for such a modest response by the Congress. We would be glad that the entire apparatus of the Leviathan state had not begun a global War on Arson and arrested anyone carrying matches.
Like dictators and führers, politicians always come to the scene of a natural disaster carrying a wad of cash. William Anderson documents that this scam really took off during the Clinton presidency, but these days government sits through every natural disaster with bated breath, hoping for a chance to do what it does best: grab power and hand out other people's money to friends of the state. As for the actual rebuilding, it is done by private enterprise, and in a timely and efficient manner. It is the social means (to use Oppenheimer's phrase) that rebuilds and restores, not the state.
I have taken you through all of this in order to illustrate a larger point about how private enterprise and the social means respond to every manner of exogenous shock that attempts to derail the path of progress. The biggest barrier of all, something far more costly than all the natural disasters combined and even great criminals acts such as that which occurred on 9-11, is government itself. It daily interferes with the path of progress through taxes, regulations, distortions such as subsidies and price controls, as well as wars and trade barriers. It is helpful to think of the way free enterprise responds to government: it’s the way society responds to a natural disaster. Yes, some people get rich off government. But taken as a whole, it is a disastrous cost on society that must be overcome.
Government is not productive. It is not creative. It does not bring blessings. Government spending drains resources from society, taking from those in whose hands it has the highest value and putting into the hands of people who serve the state. Regulation forestalls choice. Taxation loots from people the reward of work and productive endeavor.
Most destructive of all is war, and yet it is war that people are most likely to credit with bringing prosperity. But as Mises says, "War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest."
Of course he wrote that in 1919. Today, I'm sure we would have no problem finding people who say such preposterous things. Austrians are unique in having great clarity about the damage caused by government. And yet sometimes even Austrians have a tendency to underestimate the power of free enterprise to overcome obstacles to serve the world and bring prosperity to the multitudes. I doubt that even the most ardent fan of free markets would have imagined that ex-Red China could be transformed in such a short period of time, that Eastern Europe would undergo a total upheaval towards prosperity in a mere ten years, that New York could so quickly bounce back after 9-11, that the recovery after the dot com bust would be so rapid.
Alone among schools of economics, Austrians understand the dangers of credit expansion of all sorts, of how even small interventions can cause terrible dislocations, how the downside of government policies are overlooked by just about everyone. To explain and articulate the downside is our comparative advantage. This is one reason that Austrians tend to be better at anticipating the bust than seeing the boom. To explain the fact of ongoing destruction is not the same as having perfect predictive power concerning the creative response by producers and entrepreneurs.
Austrians have had their fair share of gloom-and-doomers among financial economists, and they have been right more times than we realize. Mark Thornton has a new study out that examines what economists were saying during the height of the dot com boom. He found that Austrians were just about the only ones who saw that it had to come to an end. And many called the timing exactly right. This was at a time when most everyone else saw nothing but endless price increases for securities in our future.
But being able to see the downside should not make us blind to observing the astonishing ways in which private enterprise is able to adjust itself so well in the presence of government intervention. Despite living with the largest governments ever created in the history of the world, the free market has been able to work around them to be the source of the second greatest technological revolution of the last 500 years, namely that which has taken place between the invention of the microchip and the commercialization of wireless technology. We live today with technology that would have been unimaginable even five years ago.
Let me just give an example of this. It is within the power of any of us in this room to have delivered to a family member living anywhere in this country just about any CD, book, clothing, or food item that they may desire, by express to their door by noon tomorrow, merely by clicking on a few buttons from any one of the laptops located in this room, and to track that package on its way to delivery through live websites. All of this takes place within the framework of the market matrix. If you take a trip to your local wireless dealer or office supply store and have a look at the technology that is out there these days, you observe an amazing array of astonishing gizmos that have been created, perfected, marketed, and employed outside the radar screen of government.
There was a time when something like the Food and Drug Administration or the Consumer Product Safety Commission could claim to keep up with all the products we use. But today the consumer markets are moving so fast and with such power that government can't possibly keep up. When it gets involved in an antitrust suit involving technology, we can only marvel at the sheer ignorance with which government regulators and judges approach these topics. Truly government today is living decades behind the rest of the world, on the belief that its old-fashioned methods of coercion and propaganda can competently deal with a digital world of wireless and instant everything.
Communications technology is the most obvious example. Government once aspired to control all the command posts in society, among which was the technology that permitted people to talk to each other and pass on information. Government still attempts this, with its ridiculous post office and public utility monopolies. But the private sector has moved way beyond this. We have email, cell phones, instant messaging, Google, and amazing technologies that combine all of these to produce an alternative communication infrastructure that lives and thrives outside the ability of government to manage it. Hillary Clinton complained that the web lacked much-needed gatekeepers. Well, that was years ago. The would-be gatekeepers are still nowhere to be seen, and we are none the worse off.
We should never forget, in the midst of all our warnings about government power, that government is deeply incompetent, and laughably so. Consider the attempts by the World Trade Organization to presume to manage global trade. The WTO was created in 1995 as a follow-up to the failed attempt in 1948 to create a Keynesian-style command center for the management of the world economy. Today, the WTO, at its least intrusive, serves as little more than a dispute resolution panel—a service that would otherwise be provided by private enterprise. The idea that it serves as some sort of planning board for the world economy is utterly laughable, not because the WTO would not relish that role, but that it would be impossible for it to do so.
The WTO came about in 1995, about the period when world trade began to blossom as it had not in 100 years. China was solidly on the path toward its present renaissance. East Asia was becoming a hugely viable market. Latin America was entering onto a new path of integration. Most importantly of all, Eastern Europe and Russia have opened up.
The economy is global now, and there is no going back. The division of labor has vastly increased and all the world's population is involved in the great task of creating and producing to meet human needs. Where does this leave government? Doing what it has always done: looting people, starting wars, and generally being a pain in the neck. It continues to grow like a tumor on the world, but private enterprise has consistently outrun the ability of government to chase it and tackle it. It is this market, the very institution based on human liberty that we are so dedicated to defending, that is also our main weapon against the state.
Now, I'm not arguing that technology can somehow make government irrelevant. I'm sorry to report that many governments in the world retain weapons of mass destruction. The biggest government of all has the most weapons, and this government in question is the only one that has ever actually employed a nuclear weapon against civilians. Instead of naming that government, let's just call it government X. Government X has decided that it should be the world's only superpower and that it should stand in judgment over all countries in the world. It has decided that it alone has the right model of culture and politics, and that it is a snap to make carbon copies of itself in far-flung places through a few well-placed bombs.
At least, this was the view of the regime in charge of Government X only a year and a half ago. It reflected a kind of hubris and even insanity. Had that regime been successful in its wars against two other governments, let's call them Y and Z, we might have had cause to be gravely pessimistic about the future of warfare, as Government X marched through the entire alphabet of countries and changed their regimes to copies of the high-tax social democratic militarism so well practiced by Government X. But this is not the case. Military history has few failures as colossal as the war of Government X against Governments Y and Z. And while we are right to feel great sadness for the terrible loss of life on all sides, we should not regret that the empire was denied success. These wars were nothing but cases of government intervention gone terribly wrong, unnatural disasters visited upon the populations of all the countries involved.
And yet we overcome. World trade proceeds apace, and production continues, not because of the order brought to the world by government, but in spite of the disorder brought to the world by government. The market has not only taken on the burden of confronting nature itself, which erects so many obstacles to the well-being of the human population, but government as well, which is the largest obstacle to progress ever known in the history of civilization.
One reason natural disasters alarm us is that there seems to be very little we can do to alter their course. Anti-hurricane intellectuals can do very little about changing the direction of an Ivan or Jeanne. However, intellectuals can alter the course of unnatural disasters such as government. Governments themselves are products of ideas, mostly bad ones, and they can be curbed and dismantled by other ideas.
As lovers of liberty, it is essential that we constantly warn about the dangers presented by the state. But it is also our job to constantly say, in as many ways as we can, that it does not have to be this way. The state is not the foundation of society, it is not the source of our security, it does not bring about prosperity, and it does not protect us. Government instead stands outside of society and lives off its proceeds, and does so for its own benefit and not that of society. To understand this and impart this message to the current generation of students that benefits so enormously from the blessings wrought by the market is surely a task worthy of all our efforts.
This afternoon I have spoken at length about crisis and destruction and the response. I've done so because of something I've noted from the students who now come to us for the Mises University and read our materials. The events of 9-11 have shaped the current generation of students. These students do not remember the ideological wars that we older folks grew up with, which pitted communism against capitalism.
Today, the essential question is whether government or the market is the essential source of our security and justice. To those students who have accepted the claims of the state, that justice comes through war, and that the state must abolish all that came before in the name of providing future protection, to these students, the state is the heroic institution of our time. It has become for them, tragically, the source of social salvation.
On the other hand, the event also raised up a new generation of very thoughtful, highly active, and analytically rigorous students who have seen through the propaganda. They have seen how the state so cynically used a tragedy and crisis of its own creation in order to fasten a kind of despotism on a country with a libertarian heritage, and how this response has made us less safe and wrought vast amounts of destruction. That dreadful day forced a choice on an entire generation: to follow the path of power wherever it leads, or to rethink all the assumptions that dominate the intellectual climate of our time.
Those of us in the Misesian tradition of thought are very fond of intellectual combat and delineating the differences between our way of thinking and that of our adversaries, whether they are on the right or the left or somewhere in between. At the very core of the difference is one's view of the viability of human cooperation apart from state intervention. If you can understand how a small community can recover from a hurricane without the aid of government, or if you can understand how a magnificently productive global economy can grow and thrive and provide for billions, without the aid of a global state, then you understand a very critical point. It is this: society and all its works can thrive without central management by a coercive apparatus. If people have liberty, property, and law, they have the basis of what it takes to make a civilization. Anything that compromises those institutions is a force for de-civilization.
After a natural disaster hits, we open our doors to see a space desperately in need of clean up. With regard to government in the world today, we see something very similar. Let us open our doors and look without flinching at the terrible mess that the state has made of our world. To those who say this is beautiful and productive, let us explain why this is not so. Let us point to wars and poverty, mass sickness and disease, and explain their cause. Let us stand up to those who would celebrate destruction and show that it is unnecessary and terribly tragic. And let us not despair when we see a world torn asunder by the state, but rather see the evidence of invention and creativity which surrounds us, and look for every opportunity for rebuilding.