Power & Market

What to Do (And What NOT to Do) after Disasters Strike

In the following diagram, Jesús Huerta de Soto has summarized the actions people take to recover from a disaster when people are free.


Data from Jesús Huerta de Soto.
Graphic interpretation by author.

Figure. Stylized stages when free people save and invest.

The starting point in sustainable recovery is when deprivation stops being added. A hurricane ends. A war has ended. A government-money-error cycle reaches a low point and for once, government people don’t inflate the money quantity, which would start a new government-money inflation / recession cycle.

Stage 1

In a deprivation’s wake, people are producing and buying smaller quantities of consumer goods.

Consumer-product producers need to apply their fixed costs to as much production as they can, and need to keep as many of their people employed as they can, so they need to limit how much their production quantities decline. To do this, they reduce their product prices.

Stage 2

At the reduced prices, workers pay less to buy a given quantity of products. Their work has become more valuable; their real wages have increased.

Workers save more. Bankers have more saved money to loan to producers for projects or to customers for purchases. To loan this additional money, bankers price loans lower—they reduce interest rates.

Reduced interest rates give workers less interest on their money saved in banks, so workers move more money to riskier but more-rewarding investments in stocks. Workers’ increased investments increase stock prices. Increased stock prices in turn lead workers to invest even more of their saved money in stocks.

Meanwhile, producers’ smaller production quantities and lower prices make producers’ nominal profits smaller. Producers respond by reducing the number of workers. In time, the generally lower nominal prices mean that producers’ real profits end up not having declined as much.

Stage 3

Capital-products producers invest, hire workers, and increase production quantities. Workers move to capital-goods producers and away from intermediate-products producers and consumer-products producers.

Stage 4

Intermediate-products producers devise new products that make production more efficient overall, saving customers money, by making the structure of production more complex by adding production steps. These producers invest in capital products, hire workers, and produce new products.

Stage 5

Consumer-products producers invest in capital products, produce more, and lower their products’ prices.

Overall, a disaster makes producers produce smaller quantities and lower their prices. Workers first save more, producers then invest more in capital goods and in new production steps, and workers produce more, earn more, and finally buy more.

Along the way, unsustainable investments fail, the sooner the better. People salvage reusable materials and skills.

Free people work, save, and shop the best ways they each know of to produce value at every point in time. Free people recover from disasters truly sustainably—that is, in the way that will be sustained by saved earnings—and as quickly as they can.

In this case, the government-centric GDP increases not because “demand” increases but because supply increases—that is, workers earn and save more; producers invest more, increasing productivity; and workers earn more, producers produce more, and workers buy more.

When manmade disasters recur, when recovery feels tied down, ask yourself: What’s keeping people from freely adapting and recovering? What’s slowing people down?

Maybe ask yourself instead: What are government people doing that doesn’t slow us down?

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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