Be careful what you wish for
Published in Insights, The New Zealand Initiative’s newsletter, 17 April 2020
The longer the acute Covid-19 crisis lasts, the more we hear that our economic world will not be the same after the crisis.
Some things will of course change. Companies lost to the crisis will no longer be here. Supply chains will have to be redesigned. And we will be paying for the costs of our response to the crisis for a long time to come.
But what many commentators mean by their references to a whole new world is quite different. In their view, we can expect – and may even look forward to – a different world for business and the whole economy. They should be careful what they wish for.
On the more harmless side of the changes, for example, it is assumed that we will have fewer personal working contacts. Business trips, meetings and conferences will be permanently switched to digital, they say.
This may be so, although I believe that most of us today long more than ever for direct human contact.
But the suggested changes in the economic order are more dramatic. We hear the state should play a greater role in managing the economy. It should control international trade, prop up the tumbling media industry and start a big house-building scheme. The government should pursue a targeted industrial policy, introduce employment schemes and devise economic stimulus programmes.
All this could come true – at least if there are enough political sympathisers for these interventions.
The problem is not so much that these changes are unimaginable. Because they certainly are. The problem is rather that such shifts would be fatal for the job prospects and prosperity of ordinary New Zealanders.
Even this crisis cannot override the fundamental laws of human economic activity.
After more than two centuries of modern economics going back to Adam Smith’s Wealth of Nations, there is no doubt about some unalterable principles.
These economic principles include the importance of the division of labour, thinking in terms of opportunity costs, and the function of comparative advantage. We know about the crucial role of stable institutions, the rule of law and the need for monetary stability. We understand the advantages of spontaneous innovation over state planning, the need for prices as signals for economic activity and the importance of competition for human progress.
All these basic principles have been empirically confirmed a thousand times over. No previous crisis, war or pandemic has ever been able to suspend them. Just as you cannot make water flow up hill.
The Covid-19 crisis does not and will not change the principles of economics – but that will not stop politicians from trying. We should not let them.