If a reminder should be tattooed on the arms of all politicians and bureaucrats, it would be the reflection of the Russian official who, after the breakup of the Soviet Union, asked British economist Paul Seabright (quoted in Philip Coggan, More [The Economist, 2020], p. 357):
Who is in charge of the supply of bread to the population of London?
But I agree that a compulsory course in microeconomics would be more effective than a tattoo.
During the pandemic, it was thought that a czar should be in charge of the production or distribution of masks and other medical supplies in America. The situation was not better in many or perhaps most countries. Donald Trump named Peter Navarro as his “equipment czar.” Nararro talked tough, a bit like the speculator fighters during the French Revolution—see my post “When Free-Market Prices are Banned,” April 1, 2020. (He was then very much law-and-order, until he was prosecuted by other tough-speaking law-and-order types.) It is revealing that powerful government figures are affectionately called by the name of the Russian absolute rulers (whose two-headed symbol adorns the featured image of this post). So, the US government subsidized domestic companies to produce masks and Americans are now stuck with the inefficiency of the beneficiaries (“The U.S. Invested Millions to Produce Masks at Home. Now Nobody’s Buying,” Wall Street Journal, February 4, 2024):
By early 2022, Moldex was producing 5 million medical-grade N95 masks a month. Most were bought by HHS [Department of Health and Human Services] and distributed to hospitals and government agencies. Mask orders dropped off later that year, causing Moldex to stop most production at the Tennessee plant in early 2023.
American health services, like the bread vendors in London, are again in charge of their own supplies. They buy less expensive masks, which are, not surprisingly, produced in developing countries with their relatively unproductive (and thus inexpensive) labor. Apparently, some conclude that the “price playing field” should be “leveled”:
“How do you level the price playing field? That’s what it comes down to,” said Mike Schiller, interim director of the Association for Health Care Resource & Materials Management.
The only efficient way to “level the price playing field” is to let competition free, which amounts to saying that everyone is at liberty to buy where he considers the best bargain, at home or abroad, and any producer is free to respond to demand. It is called economic freedom. The current drama is that, as national states are rediscovering their pre-industrial habit of restricting exports, buyers may tomorrow have to pay a premium for domestically produced goods. But let them make their own trade-offs. Laissez-faire, morbleu!
That this lesson has not been learned is an intriguing phenomenon. Many factors must be in play: the non-intuitive character of economic theory compared with the tribal intuitions and authoritarian experience of mankind during the 500,000 or so preceding the epoch of Adam Smith; the values or interests of those who, consciously or not, undervalue the welfare of the common people; and our political technology, which gives coercive power to 50%+1 of the voters or to others who control the political agenda.
The ordinary people who made the Industrial Revolution and to whom we owe our wealth and our (much threatened) liberties were celebrated by Deirdre McCloskey in her Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World (University of Chicago Press, 2016):
In the eighteenth century certain members of the clerisy [artists, intellectuals, journalists, professionals, and bureaucrats], such as Voltaire and Tom Paine, courageously advocated our liberties in trade. And in truth our main protection against the ravenous has been just such competition in trade—not Citi Hall or Whitehall, which have their own ravenous habits, backed by violence. …
Much of the clerisy [later] mislaid its former commitment to a free and dignified common people. It forgot the main, and the one scientifically proven, social discovery of the nineteenth century … that ordinary men and women do not need to be directed from above, and when honored and left alone become immensely creative. …
The modern world was made by a slow-motion revolution in ethical convictions about virtues and vices, in particular by a much higher level than in earlier times of toleration for trade-tested progress—letting people make mutually advantageous deals, and even admiring them for doing so, and especially admiring them when, Steve-Jobs like, they imagine betterments. … Trade-and-betterment toleration was advocated first by the bourgeoisie itself, then more consequentially by the clerisy, which for a century before 1848, I have noted, admired economic liberty and bourgeois dignity … By then, however, as I also noted, much of the avant-garde of the clerisy worldwide had turned decisively against the bourgeoisie, on the road to twentieth-century fascism and communism.” …
The original and sustaining causes of the modern world … were the widening adoption of two mere ideas, the new and liberal economic idea of liberty for ordinary people and the new and democratic social idea of dignity for them.
When ordinary people want to rule, instead of exercising their equal individual liberty in voluntary social cooperation, the result is not democracy as McCloskey and classical liberals understand it, but competitive czarism. The true democratic ideal is that each ordinary individual rule over himself (or herself, of course).
READER COMMENTS
steve
Feb 20 2024 at 9:57am
This was predictable, but what is the answer to a product that we might need in very large quantities that require specialized production but only once every 20-30 years, but we dont know when among those years? When that happens it is also pretty predictable that the host country where stuff is being produced will forbid exports, especially if the relationship is strained anyway. We have learned that in the private sector facilities wont maintain large stockpiles.
Steve
Pierre Lemieux
Feb 20 2024 at 10:18am
Steve: That’s a good point that illustrates a better point—a double one in fact. Domestic producers (and some foreign ones) will maintain smaller or larger stocks depending (1) on their risk of running out of them and (2) on the probability of their speculation being remunerated by high profits. [1] On the evaluation of the risk, private companies are certainly more efficient than politicians and bureaucrats. [2] As for their chance of making extraordinary profits, they are precluded by the price controls that accompany the declarations of emergency. Dirigisme begets dirigisme. If prices of bread in London were capped, a bread czar would be needed. The first step would be to abolish the Defense Production Act and its price controls.
Jon Murphy
Feb 20 2024 at 10:49am
There is another factor at play, too: anti-price gouging legislation.
Pierre Lemieux
Feb 20 2024 at 1:09pm
Jon: You’re right. It is an important factor. I didn’t mention it because there are still a few states (probably less than one-fourth now) where suppliers could charge market prices and benefit from accumulating stocks. (Granted that these states probably cover only a very small part of the manufacturing industry.) But, if an emergency is declared at the federal level, even those would be stopped by the federal price-gouging law, that is, the DPA.
Craig
Feb 20 2024 at 1:33pm
“We have learned that in the private sector facilities wont maintain large stockpiles.”
I too am a Monday Night quarterback, but here’s the thing. Maybe Publix wasn’t ready for the black swan event and ran out of hand sanitizer and masks, right? But I could just as well ask, “Why weren’t YOU ready?” Why didn’t YOU have that in stock? In South FL, I have a generator and 20 cases of water and the pandemic hit and I was shimmying up palm trees for natural toilet paper like everybody else, right? Prepare for what? And at what cost? And for which black swan event?
Its always easy after the fact to think, “Gee, we should’ve been prepared for that.”
Pandemic hit and you know what? I have zero masks and one bottle of hand sanitizer. I do have a pallet of toilet paper though because those sawgrass palm fronds chafe.
steve
Feb 20 2024 at 2:22pm
You guys are talking theory. I am talking what really happens. If a medical facility chooses to stock adequate reserves for that once in a lifetime event they lose money. If their competitor does not they are at a competitive disadvantage. The result is that when it comes time to cut costs stockpiles are minimized. Essentially everyone has embraced just in time stocking since it cuts costs. The same holds true on the manufacturer side. They build to maximize profit so they dont have a lot of excess capacity sitting around to handle a surge in needs. If you do build extra capacity you know it wont be needed in a short while so it’s hard to recoup the investment.
“Its always easy after the fact to think, “Gee, we should’ve been prepared for that.””
But in this case it’s something we know is going to happen, we just dont know when. The free market doesnt really have a solution since maintaining stockpiles or production capacity means losing money.
Steve
Pierre Lemieux
Feb 20 2024 at 2:58pm
Steve: With due respect, what you said just proves that you need theory, notably a demand curve, a supply curve, and prices. Why can you always buy land (except for zoning regulations)? Why don’t land speculators sell all their land right now? Why don’t all owners of Renoirs sell them? Why was there no shortage of gasoline (queues at gas stations and rationing by license plate number) in Canada in the 1970s? Why will the Lloyds always quote you a price? Why were people arrested when selling scarce masks and cleaning supplies during Covid? Why are you sure you will always find a babysitter on the market? Why do medical doctors drive taxicabs in Cuba? Why can you buy bread in London?
Theory is indispensable to understand what happens in the real world.
Jon Murphy
Feb 20 2024 at 3:08pm
And yet, despite your assertion, many (most) firms do indeed have stockpiles. We have an entire industry established around exactly that: warehousing. Not to mention numerous forms of technology (such as cold storage) that make stockpiling cheaper. There is indeed a tradeoff in keeping inventory on hand, but it is not a net cost.
It’s also worth noting, to Pierre’s point, that during the pandemic the US had lots of capacity to produce PPE and other items. The federal government often refused to allow such production. Various rules prohibited increased production of masking, hand sanitizer, etc. The free market was ready, willing, and able to resolve these issues. The government outright refused.
Warren Platts
Feb 20 2024 at 5:18pm
That in itself was product of regulation. There was never any scientific evidence that the masking requirements do much of anything other than increase CO2 concentrations in what people are breathing.
Jon Murphy
Feb 20 2024 at 6:36pm
Fine, but irrelevant. The point is that the free market was willing and able to prevent shortages until the Trump Administration, and various state administrations, forced them not to.
steve
Feb 21 2024 at 10:32am
No. People maintained small stockpiles. They did not maintain, and will not maintain, stockpiles large enough should a pandemic occur. It is a rare event so people will lose lots of money if they maintain stockpiles large enough for that rare event. They also need to be monitored and replaced as they are subject to dry rot, as we (and many other hospitals) found out. As to production in the US we did not have the capacity to quickly increase production to meet our needs. It is true that a couple of places offered to spool up as quickly as possible but they wanted guarantees from the govt to cover their costs since they knew that as soon as the pandemic died down they would have excess capacity, which is what happened since they can be made more cheaply in China. Some DoD money was spent but mask companies largely didnt get much help.
So left to the free market we will have a gap of about 6 months until things ramp up and we can begin to provide almost enough masks. The big companies like 3M say they are going to maintain inactive lines but after about paying to keep those functional while competing against companies they dont do that they will be cut to improve the bottom line. It’s where the incentives lead.
https://www.npr.org/2021/06/25/1009858893/u-s-companies-shifted-to-make-n95-respirators-during-covid-now-theyre-struggling
Steve
Pierre Lemieux
Feb 21 2024 at 11:09am
Steve: You write:
What will happen in London if demand for bread doubles? (Say, because the supply of meat has suddenly dropped.) That’s an even more interesting case because bread can’t be stocked as long as masks. Prices will jump as consumers bid them up (like, say, recently, in the case of olive oil or bottled water). Prices. This will justify producers to increase quantity supplied in the long run and supply in the longer run. Now, use economic theory (public choice) to model will happen if a bread czar is in charge? (You can test your conclusion with meat in the Soviet Union or Covid supplies in the United States.)
You might again have a look at my comparison of gasoline in the US and Canada in the 1970s.
Richard W Fulmer
Feb 21 2024 at 11:17am
We didn’t leave it to the free market. In 1999, the federal government created a stockpile of medical supplies that included N95 masks and other PPE. The stockpile was depleted during the 2009 H1N1 flu outbreak and a dozen other emergencies but was not restocked under either Obama or Trump.
Jon Murphy
Feb 21 2024 at 11:43am
We did. We had people begging the government to let them raise prises so they could produce, but the fed and local governments refused. I document it in my dissertation, but it was also discussed here a lot (I believe Scott Sumner had a post or two).
Jon Murphy
Feb 21 2024 at 12:50pm
Here’s the fundemental problem with your comment Steve: you’re ignoring time.
It is true that many people (although not all) probably do not carry massive stockpiles. Indeed, the cost is likely too high. But, as we have noted above, that is because of disincentives created by the government, not some free market flaw.
One of the biggest is price controls. You need prices to rise when there is a sudden increase in demand for two reasons:
First: in the short run, to ration supplies. Even if we assume suppliers cannot rapidly increase production, demand is still there. A higher price means that people will make choices: either not wear a mask (and thus not go out), or search out subsitutes (social distancing, etc).
Second: in the long run, encourage more production. If prices rise, then suppliers become incentivized to search out ways to increase production. Perhaps they move from other lines of business (eg, stop making so many gloves and make more masks). Perhaps new suppliers enter the market (like when alocohol distillers tried to make hand sanitizer before the feds shut them down). Without that higher price, the incentive is not there, which leads to perpetual shortages.
Furthermore, with the COVID pandemic itself, there is substantial evidence the price controls designed to “level the playing field” actually made the pandemic worse. The shortages caused by price gouging legislation increased the amount of time people had to spend going to stores, leading to more contact, and greater spread, especially in the early days of the pandemic.
Jose Pablo
Feb 21 2024 at 3:00pm
They did not maintain, and will not maintain, stockpiles large enough should a pandemic occur.
Very likely because that’s the most sensible thing to do (at least within the “boundary conditions” that governments have created).
We don’t maintain weapons stockpiles large enough should a “major” war occur (not even enough for “regional” conflicts, it seems)
We don’t maintain idle regasification capacity (for instance in Europe) large enough should a curtail of gas exports from Russia suddenly occur.
We, people living in cities, don’t maintain stockpiles of vegetables and fruits large enough should a major break in food transportation capacity occur.
We don’t maintain stockpiles of wooden arrows large enough should a zombie apocalypse occur.
Because we are, for the most part, pretty sensible as individuals. Government is required to do moronic things.
Craig
Feb 22 2024 at 12:13am
“We did.”
If my memory serves me correctly, Professor Murphy, I believe you made an argument along the lines of ‘things can actually be ‘too safe” and I think that is a parallel issue to the one being presented here. Steve’s post-pandemic Monday night quarterbacking is not wrong, indeed I’d suggest its an important survival mechanism employed by humanity to actually respond to the events that are killing people. Difficult to argue against, “It happened therefore we should’ve been prepared” And Steve is not posing a bad issue to ponder, in essence he’s arguing ‘Gee, there was a pandemic, it killed millions of people and it seemed it was forseeable enough that there should’ve been more N95 masks around’ Or more capacity to make them — perhaps even domestically so as to preclude foreign governments from cutting the US off from needed supplies, right?
If that decision had been made in 2019 that surely would have been fortuitous, but that’s only knowing the then-future. When you don’t know the future, you don’t know, so another pandemic? tsunami? earthquake? nuclear war? Tunguska meteor event or worse? blight/famine?
And for sure as we get ready for the next pandemic, there’s an opportunity cost to that, those resources aren’t too useful for preparing for the next tsunami, right? It would seem to me that the concept of ‘too safe’ is akin to ‘too prepared’ and the economy would revert to one of impoverished preppers.
Warren Platts
Feb 20 2024 at 5:21pm
Hence why free trade — aka labor arbitrage — is a race to the middle. Great if you’re on the bottom, but not so hot if you’re on the top.
Richard W. Fulmer
Feb 20 2024 at 6:43pm
Labor will always be more productive – and therefore better paid – in a country in which workers are better educated, more skilled, more adaptable, and more mobile, and in which infrastructure is reliable and good.
U.S. productivity is falling behind because we have given centralized control of our schools to government and teachers’ unions, and we have given the government more control over our infrastructure. Nationalists’ solution is to also give the government centralized control of our economy.
Jon Murphy
Feb 21 2024 at 12:42pm
I don’t want to spend too much time on this because the thread is completely off-topic, but Richard’s comment shows why the results Warren predicts in his comment do not occur.
Warren is using a trade hypothesis from the 40s known as Factor-Price Equalization. Leaving technical details aside, this model predicts that the returns to the relatively scarce factor of production in a country will fall while the returns to the relatively abundant factor of production in a country will rise. So, if a country like the US, which has relatively scarce labor (indicated by high opportunity cost of labor) trades with one that is relatively abundant labor, like China, the theory predicts that returns to labor will fall in the US and rise in China and equalize somewhere in between.
However, this model rests on a key assumption: identical technology between trading partners and identical cost structures. In other words, the results only hold if the two nations use identical methods to produce their goods they exchange. Furthermore, labor had to be identical between the two. In the real world, these assumptions do not hold; as Richard notes, US workers are far more productive (and thus better compensated) than Chinese workers.
The fact that the US and China are not identical are why the “race to the middle” Warren predicts has not come about; indeed, real compensation (monetary wages + nonmonetary wages) has continued to rise.
There are other problems with Factor-Price Equalization when examining dissimilar countries, but to go into more detail will take us farther afield.
Frank Clarke
Feb 21 2024 at 12:57pm
Anyone who claims the ability to “manage an economy” is lying, unless their plan is to get out of its way.
Jose Pablo
Feb 21 2024 at 8:08pm
You are wrong Frank.
The only problem with managed economies is that they weren’t managed by me. Otherwise, they would have been a total success.
Jose Pablo
Feb 21 2024 at 9:35pm
The true democratic ideal is that each ordinary individual rule over himself (or herself, of course).
It is funny what happens with the word “democracy” (and its variants). Everybody (from Pierre to Nicolas Maduro, not less!) use it to describe their favorite form of government (which, obviously, is in each case, the “true democracy”).
https://radio.uchile.cl/2019/01/10/nicolas-maduro-somos-una-democracia-de-verdad-no-una-democracia-de-las-elites-que-reparten-privilegios/
They are class-biased democracies, where the many are viewed as greater in number but lower in quality. But not in Venezuela. In Venezuela, democracy is there for the many, and what’s fair is what’s good for all the people.
“Democracy that is good for each ordinary individual” and “democracy that is good for all the people” seems to be two very close forms of “true democracy”. And yet, I have a strong intuition that Pierre and Maduro are talking about two very different forms of organizing collective affairs.
I find this polysemy of the word “democracy” extremely confusing. When “democracy for each individual” and “democracy for the people” are so different while seeming so close, you can be sure that semantics are not helping to have a meaningful discussion.
Using the word democracy has become a meaningless way of adding stature to your favorite political model. Nothing more. At this point, its use should be banned, for confusing, in any positive serious conversation. It should be like “Hitler”: any time you use it in a debate, you lose the debate.
Pierre Lemieux
Feb 23 2024 at 1:14pm
Jose: That’s a fair criticism. I invoke democracy in the sense of Buchanan and Tullock, as an implementation of unanimously accepted rules, or in the more mundane sense of William Riker, as a way to peacefully transfer (tolerable) power. Majoritarian democracy cannot be an ideal; unanimity is the normative ideal.
vince
Feb 24 2024 at 3:24pm
Does such a thing exist?
Jose Pablo
Feb 24 2024 at 7:47pm
The only hope for improvement lies in what doesn’t exist … yet.
Such a thing as “American democracy” didn’t exist before the American Revolution. And you could argue that would have never existed if not for the ability of the Founding Fathers to imagine things that have never existed before.
What is clear is that there is nothing special in the majority rule. Which doesn’t significantly simplify the decision-making on collective issues (compared to, for instance, a 30% agreement rule or a 60% agreement rule) or doesn’t significantly reduce, either, the cost to individuals of collective decision making (which the “unanimity” rule sure minimizes).
It is a pity to keep maintaining a suboptimal rule just because of what basically amounts to a sad lack of imagination. Or as Buchanan puts it:
“An alternative (…) explanation for the predominant role that majority rule has achieved in modern democracy theorizing may be found when we consider that most of this theory has been developed in noneconomic, nonindividualistic, nonpositivistic terms.”
Pierre Lemieux
Feb 27 2024 at 11:21am
Vince: That’s a good question. To try and answer it start with Buchanan (The Limits of Liberty and, with Brennan, The Reason of Rules), then to De Jasay (my review of his Against Politics will soon appear on Econlib).
vince
Feb 24 2024 at 2:52pm
So is this the point: Free markets always produce the best solution but when it doesn’t, government is the problem?
Why didn’t China have a mask shortage?
https://www.nbcnews.com/politics/national-security/dhs-report-china-hid-coronavirus-severity-order-hoard-medical-supplies-n1199221
BTW, lawfare is why Navarro is in jail.
Pierre Lemieux
Feb 27 2024 at 11:16am
Vince: It seems to me that a deeper explanation of why Navarro, Trump, and their ilks are not in jail is that they are not, instead, living in Renaissance Venice: https://www.econlib.org/a-humble-state-with-no-motorcade/.
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