Economic Effects of Covid-19 and Government Intervention

In this article, I want to write a shorter version of Jesús Huerta de Soto’s essay about The Economic Effects of Pandemics: An Austrian Analysis. De Soto is Spain’s leading Austrian economist, a Senior Fellow of the Mises Institute, and serves as professor of economics at King Juan Carlos University in Spain. In his paper, before introducing to us his thesis and arguments, he first gave us a summary of the Austrian Business Cycle Theory.

This is de Soto’s summary of the Austrian Business Cycle Theory. It starts with the initiative of central banks in expanding credit with the assistance of the private banking sector in the infusion of this new supply of money into the economy. Through fractional reserve, these financial institutions create money “from nothing in the form of deposits which it injects into the system via loans to companies and economic agents in the absence of a prior real increase in voluntary saving.” As a result, “the productive structure shifts artificially toward numerous projects which are too capital intensive and could mature only in a more distant future.” Unfortunately, economic agents will be unable to complete these projects and so “certain reversion processes inevitably follow and reveal the investment errors committed” that will lead to the abandonment of unsustainable projects. A restructuring of the economy will then follow “by transferring productive factors (capital goods and labor) on a massive scale from where they were used in error to new, less ambitious but truly profitable projects.” “Once recovery is well underway, sooner or later the authorities again succumb to old temptations, rationalize policies that have failed again and again, and reinitiate the whole process of expansion, crisis, and recession, and it all begins again.”

To end the recurring cycle of boom and bust, de Soto advocates the elimination of central banks and the return to a sound monetary system, which he describes as “the classic pure gold standard,” and make “private banking subject to the general principles of private property law – that is, a 100-percent reserve requirement for demand deposits and equivalents.”

After giving an overview of the business cycle theory, de Soto presented to us his thesis:

“In this paper, we will analyze the extent to which a pandemic like the current one (and similar pandemics have struck a great many times in the history of mankind) can trigger these and other economic effects and the extent to which states’ coercive intervention can mitigate the negative effects of pandemics or, on the contrary, can become counterproductive, aggravate these effects, and make them last longer.”

He then gives us the outline of his arguments:

• Analysis of the possible impact of the pandemic on the economic structure.
• A comparison of the responses of the market and the state towards the pandemic
• An examination of government intervention particularly in terms of fiscal and monetary policies.

The Effects of Pandemics on Economic Structure

By economic structure, de Soto includes labor, productive structure, and capital goods. Under this section, he also takes into consideration the uncertainty caused both by the pandemic and government intervention, and the demand for money.

On Labor

By the impact of pandemics on labor, I understand it in terms of cost in human lives. In contrast to the “Spanish flu” that “killed an estimated 40 to 50 million people worldwide beginning in 1918” whom mainly “were relatively young and strong,” the vast majority of victims of Covid-19 “are elderly, retired people and people with serious pre-existing conditions.” As such, “the current pandemic is not having a noticeable impact on the supply of labor and human talent in the labor market . . .”

De Soto complains that monetarists and Keynesians identify the “‘beneficial’” economic effects of pandemics. They “argued that these tragedies permit economies to overcome their lethargy and start on the road to a buoyant ‘prosperity.’” For them, the pandemic provides “justification for economic policies of intense monetary and fiscal interventionism.” Ludwig von Mises describes these interventionist policies “as pure ‘economic destructionism,’ since they simply serve to increase the money supply per capita along with, and especially, government spending.”

On Productive Structure and Capital Goods

How about the impact of the pandemic on the productive structure and capital goods? To answer this question, de Soto brought us back to the 14th century when the bubonic plague afflicted Europe. It was a widespread belief at that time “that everyone is very likely to catch a disease and die in the short or medium term.” As a result, people’s “subjective valuations become geared toward the present and immediate consumption.” People didn’t see any sense “in saving and launching investment projects,” since people thought that neither them nor their children will be alive to enjoy their fruits in the future. With such a dominant mindset, “people abandoned farms, livestock, fields, and workshops and, in general, they neglected and consumed capital goods without replacing them.” De Soto adds, that “the production process are abandoned” and “a very large portion of the population stops working.”

Again, in contrast from the impact of the bubonic plague, in Covid-19 we don’t see any indication of such popular mentality as to time preference of the people. In fact, “expectations regarding the successful completion of investment processes that will mature in the distant future remain unchanged.” Examples that de Soto gave are investments “in the design, innovation, and production of the electric cars of the future and in many other long-term investment projects.”

However, though time preference remains basically unchanged, de Soto mentioned at least three effects on productive structure:

Immediate short-term effect. According to de Soto, this will last a few months due to “the coercive confinement measures governments have imposed.” For de Soto, “the economic standstill decreed for several months has . . . affected mainly those productive efforts furthest from final consumption.” For him, “the population – even people confined to their homes and unable to work – have had to go on demanding and consuming consumer goods and services” by ordering online. Consequently, for de Soto, “the final demand for money intended for consumption has not significantly changed . . .” Once this mandatory stoppage ends, “the production process can start again where it left off, since” there are no bad investments made prior to the lockdown. Comparing the Covid-19 situation to the 2008 crash of housing market, for de Soto, in the current situation, “the productive structure has not been irreversibly harmed, and thus there is no need for a prolonged, painful process of reorganization and massive reallocation of labor and productive factors.” In his mind, “all that is needed is for entrepreneurs, workers, and self-employed people to go back to work, pick up their tasks where they left off, and use the capital equipment that was not damaged (several months ago) and is still available now.”

Commenting on the impact of the enforced cessation, for de Soto, the damage to the economy could have been reduced “if confinement had been voluntary and selective and the decision had been made on the ‘micro’ level by families, companies, residential areas, neighborhoods, etc.” or if the government methods “are not centralist and do not impose widespread, coercive, and indiscriminate confinement measures.”

Mid-term effect. This type of impact will stay for many months or “around two years.” The economic sectors that will experience this kind of results are “tourism, transportation, the hotel industry, and entertainment.” Since this will be the case, these “sectors require a more profound change” in order to adapt to the new circumstances brought about by the change in people’s preferences as a result of interventionist policies. To illustrate this, de Soto gave us examples such as preparing meals for home delivery in the case of restaurants, laying off personnel or retraining them to serve as delivery people to reduce costs, “and adjusting their liabilities to suppliers in order to minimize losses and capital consumption.” By doing these, “owners avoid having to throw away years invested in building a reputation and accumulating highly valuable capital equipment that is difficult to repurpose.”

However, not all entrepreneurs possess the capabilities mentioned above. Others “will choose to withdraw and ‘hibernate’ by temporarily closing their doors but leaving the corresponding facilities and business contacts prepared for a reopening as soon as circumstances permit.” Yes another group of entrepreneurs particularly those whose businesses “were marginally less profitable even under pre-pandemic conditions – will be forced to permanently shut down their businesses and liquidate their respective entrepreneurial projects.”

Long-term effect. The long-term effect of the pandemic pertains to the possibility of permanent changes in the consumption preference of the people and thus may also “require permanent modifications to society’s productive structure of stages of investment in capital goods.” Nevertheless, de Soto is not alarmed with this possibility for he looks at these potential changes from the perspective of much bigger and more profound changes since the start of the 21st century such as “greater globalization of trade and exchange and from the technological revolution that has accompanied it and made it possible.” Regardless of the magnitude of these changes, the “market economies are constantly adapting without major difficulties.”

Uncertainty and Demand for Money

De Soto concludes the first section of his essay by explaining the character of uncertainty as an outcome of the pandemic. His intention is to emphasize that the existing “uncertainty has led to even further promotion of fiscal and (especially) monetary intervention policies so extremely lax that they are historically unprecedented, pose a serious threat, and may well continue to have severe consequences once the current pandemic has ended.” De Soto describes the escalation of this uncertainty caused by the pandemic “particularly in the early months, with respect to the breadth, evolution, and rate of the spread and its economic and social effects.” This increase in uncertainty “has been accompanied by an increase in the demand for money . . .” De Soto further elaborates the consequences of this escalation in the demand for money in three ways:

“First, the increase in uncertainty (and the accompanying increase in the demand for money) is temporary and of relatively short duration, since it will tend to revert as soon as we begin to see the light at the end of the tunnel and expectations of improvement emerge. Therefore, it will not be necessary to wait until we have completely overcome the pandemic (around two years). Before then, there will be a gradual return to ‘normal’ levels of uncertainty until the productive structure in monetary terms will return to its prior state.”

“Second, as the new money balances accumulate due to the reduction in the demand for consumer goods . . . and this certainly does occur in the sectors most affected by mobility restrictions (the tourism and hotel industries, etc.) – this lower monetary demand for consumer goods will tend to leave a significant volume of them unsold.”

“Third and last, we must point out that monetary, fiscal, and tax interventionism by governments and central banks can increase uncertainty even further and may actually prolong it beyond what is strictly necessary and the pandemic alone would have required.”

Elsewhere, de Soto identifies government policies that will aggravate the situation include “tighter economic regulation, blocking pending structural reforms, raising taxes, interventionism, and a lack of fiscal and monetary control.” The Austrian economist devotes the last part of his article in explaining further how “governments and central banks can create an additional climate of entrepreneurial mistrust which hampers the quick recovery of the market and obstructs the entrepreneurial process of returning to normalcy.”

Interventionist Policies versus Dynamic Social Cooperation

Under this section, we will see a comparison of the responses of the market and the state towards the pandemic. In order to present this comparison, de Soto introduced the theory of Ludwig von Mises concerning the impossibility of economic calculation under socialism due to the absence of market price, identified other collateral effects of Statism predicted by the theory, elaborated the response of the market economy in a free society to the challenges posed by the pandemic, and explained the reasons for the servile attitude of the citizens.

Insights from Mises’ Theory

Applying the insights from Mises’ theory, de Soto argues that the current policies being used by governments are derived from socialist model and therefore will lead to chaos and waste. For de Soto, the current pandemic offers us an opportunity “to observe, verify, and apply to a historical case that is very close and significant to us . . .” He adds that Covid-19 “has given us one more real-life example – in this case one much closer to us and more concrete – which superbly illustrates and confirms” Mises’ theory “that is it theoretically impossible for a central planner to give a coordinating quality to their commands, regardless of how necessary these commands seem, how noble their goal is, or the good faith and effort devoted to successfully achieving it.” For de Soto, “the worldwide impact of the current pandemic, which has affected all countries regardless of tradition, culture, wealth, or political system, highlights the general applicability of the theorem Mises discovered . . . to any coercive, interventionist measure the state uses.” He recognized “that the interventionist measures adopted by the various governments differ considerably,” but these differences have actually been more of degree than of kind, since governments cannot dissociate themselves from the essential coercion in their very DNA.” And since this is the case, whenever governments implement such coercion, all of the negative effects predicted by” Mises’ “theory inevitably appear.” So the problem really “is not just that some authorities are more inept than others,” but “that all authorities are doomed to fail when they insist on coordinating society through the use of power and coercive commands.” De Soto identified two reasons why these failures are unavoidable: “First, from the viewpoint of any contemporary reader, the current pandemic is closer in time and has a personal impact. Second, the intervention models employed in other pandemics are now quite remote from us in history.”

De Soto concludes that “economic science has shown that it is theoretically impossible for the state to function in a dynamically efficient way, since it is perpetually immersed in an ineradicable ignorance that prevents it from infusing a coordinating quality into its commands.” And then de Soto enumerates four factors listed why this is the case:

“First, to truly coordinate with its commands, the state would need a huge volume of information and knowledge – not principally technical or scientific knowledge, though it would need that too, but knowledge of countless specific and personal circumstances of time and place (‘practical’ knowledge).”

“Second, this vital information or knowledge is essentially subjective, tacit, practical, and inarticulate, and thus it cannot be transmitted to the state central-planning and decision-making agency.”

“Third, this knowledge or information is not given or static, but instead is continually changing as a result of the innate creative capacity of human beings and the constant fluctuation in the circumstances surrounding them. The impact of this on the authorities is dual: They are always late, because once they have digested the scarce and biased information they receive, it has already become outdated; and they cannot hit the mark with their commands for the future, since the future depends on practical information that has not yet emerged because it has not yet been created.”

“And finally, fourth, let us recall that the state is coercion (that is its most fundamental characteristic), and therefore, when it imposes its commands by force in any area of society, it hinders and even blocks the creation and emergence of precisely the knowledge or information the state desperately needs in order to give a coordinating quality to its commands. Thus the great paradox of statist interventionism, since it invariably tends to produce results opposite those it is intended to achieve.”

De Soto provides us a more extensive description of the outcome of interventionist policies:

“ . . . we see the emergence, left and right, of maladjustments and discoordination; systematically irresponsible actions on the part of the authorities (who do not even realize how blind they are regarding the information they do not possess and the true cost of their decisions); constant scarcity, shortages, and poor quality in the resources the authorities attempt to mobilize and control; the manipulation of information to bolster themselves politically; and the corruption of the essential principles of the rule of law.”

Nevertheless, de Soto reminds us that “these phenomena do not arise from malpractice by public authorities but instead are intrinsic to a system based on the systematic use of coercion to plan and to try to solve social problems.” With this realization, de Soto repeats himself that we should not be surprised at all “that, at a moment of utmost urgency and gravity,” the authorities always prefer “coercion, regulation, confiscation, etc. instead of freedom of enterprise, production, and distribution and to support instead of hinder private initiative and the free exercise of entrepreneurship.”

Other Collateral Effects of Statism

In addition to the destructive aftermaths identified above, other negative repercussions of interventionism include the authorities taking advantage of the crisis, “the prostitution of law and justice,” and the complicity of experts with the state. Those in authority take advantage of the crisis to expand their political power “by engaging in political propaganda to manipulate and even systematically deceive the citizenry to that end.” As “for the prostitution of law and justice,” this has something to do with “the abuse of power and the wrongful and unconstitutional use of the state of alarm, when the appropriate action would have been to declare a true state of emergency, with all of the protections against government control established by the constitution.” The outcome of this is that “both the ‘rule of law’ and the fundamental content of the constitution were disregarded.” And then as for the complicity of experts, they provide “supposed scientific support for every decision . . .” By doing this, “they use the halo of science to disarm civil society and render it helpless.” This kind of action “aims to justify the notion that the experts, due to their supposedly higher level of training and knowledge, are entitled to direct our lives; and on the other hand, it aims to block any complaint or opposition by simply mentioning the purported backing of science.” In other words, governments want their citizens “to believe that, by virtue of the allegedly greater knowledge and intellectual superiority of their scientific advisors with respect to ordinary citizens, governments are entitled to mold society to their liking via coercive commands.” For de Soto, “the origin of this fatal conceit lies in the fundamental error of believing that the dispersed, practical information the actors in the social process are constantly creating and transmitting can come to be known, articulated, stored, and analyzed in a centralized way through scientific means.” De Soto rejects this notion for he considers it impossible both in theory and practice.

The Response of a Free Society to the Challenges Caused by the Pandemic

Since the ideal scenario is far from reality, there is no way we can know says de Soto, “how a free society not in the grip of the systematic coercion of state interventionism would cope with a pandemic as severe as the current one.” Nevertheless, he thinks that in the ideal scenario, the response would be decentralized and “would clearly rest on entrepreneurial creativity.” In this way, “the search for solutions and the efforts made to detect and overcome problems as they arose would be dynamically efficient.” Unfortunately, it is exactly this kind of entrepreneurial creativity, which has been prevented due to “monopolistic state coercion.”

In a free society, “problems would tend to be detected and resolved very agilely and efficiently.” In other words, “problems would be handled in a manner exactly opposite to what we see with the state and the combined action of its politicians and bureaucrats, regardless of the good faith and work they put into their efforts.” And since such situation has been blocked from us, “we cannot even imagine the immense variety, richness, and ingenuity that would be rallied to combat problems resulting from a pandemic in a free society.” However, de Soto, insists that “we have numerous indications to give us at least an approximate idea of the completely different scenario that would emerge in an environment free from state coercion.” He describes the general character of such type of response in a free society as “far more decentralized, disaggregated, and ‘micro’ in nature, such as the selective confinement of (private) residential areas, neighborhoods, buildings, companies, nursing homes, etc.” He then provides us a more concrete example of such type of response:

“Instead of the censorship exercised during the key weeks at the start of the pandemic (and the harassment of those who revealed it), information would be transmitted freely and efficiently at great speed.”

“Instead of slowness and clumsiness in the monitoring, via tests, of possible cases, from the very beginning entrepreneurs and proprietors of hospitals, nursing homes, airports, stations, means of transportation, etc. would, in their own interest and in that of their customers, introduce these tests immediately and with great agility.”

Moreover, he describes that such “entrepreneurial ingenuity would focus on testing, discovering, and innovating solutions in a polycentric and competitive manner, and not, as is the case now, on blocking and deadening most of humanity’s creative potential through monopolistic central state planning.”

De Soto affirms “the enormous advantage of individual initiative and private enterprise” over interventionist policies. He also appreciates the way a free society “operate in terms of researching and discovering remedies and vaccines.” In fact, de Soto adds that “even in the current circumstances, states have been obliged to turn to them to obtain these things quickly when confronted with the resounding failure of their pompous and well-funded public research institutes to offer effective, timely solutions.”

Furthermore, de Soto emphasizes “the far greater agility and efficiency of private health care networks (health insurance companies, private hospitals, religious institutions, foundations of all sorts, etc.), which have the additional possibility of expanding much more quickly and with much more elasticity in times of crisis.” And then he cites a curious example from his own country, that “nearly 80 percent of public servants themselves – including the vice president of the socialist government – freely choose private over public health care, while their fellow citizens are unjustly denied that choice . . .”

The Servility and Obedience of Citizens

To wrap up the second section of the paper, de Soto raised a puzzling question. This is related to the attitude of the citizenry “despite all of the inadequacies, insufficiencies, and contradictions inherent in state” policies. Why most citizens respond in servility and resignation?

Answering the foregoing question, de Soto referenced Etienne de la Boétie’s essay, Discourse of Voluntary Servitude first appeared in 1574. In that speech, Etienne de la Boétie “identified four factors to explain the servility of citizens toward rulers and authorities, and these factors are still fully relevant even today:”

First, “the custom of obeying, which, though of tribal and family origin, is extrapolated to the whole society.”

Second, “the perennial self-presentation of political authorities with a ‘holy’ seal (in the past, divine election; today, popular sovereignty and democratic support) which would legitimize the supposed obligation to obey.”

Third, “the perpetual creation of a large group of stalwarts (in the past, members of the Praetorian Guard; today, experts, civil servants, etc.) who depend on the political establishment for their subsistence and constantly support, sustain, and rally behind it; in short, the purchase of popular support through the continual granting of subsidies (in the past, stipends and awards; today, for instance, benefits of the guilefully named ‘welfare state’), which make citizens progressively and irreversibly dependent on the political establishment.”

And lastly, “the fear (incited by the state itself) which leads people to call on the authorities to do something, especially in times of severe crisis (wars, pandemics).”

Due to the limitation of the paper, de Soto could not elaborate more as to the nature of what he describes as the “grave problem, which undoubtedly lies at the root of the main social crisis of our time (and, in a certain sense, of all time).” And then he concludes the second part of his article that “in the context of our economic analysis of pandemics, what we can confirm is that there exists a ‘virus’ even deadlier than the one that triggered the current pandemic, and it is none other than the statism ‘which infects the human soul and has spread to all of us.’”

The Pandemic Providing an Excuse in Expanding Fiscal and Monetary Policies

In the third and last section of his article, de Soto discussed government’s fiscal and monetary intervention in the economy particularly the role of central banks. This economic intervention is done by way of taxation and increase in government spending. These acts are presented as solution to reduce the negative impact of the pandemic on the economy.

De Soto divides the last part of his essay into five sub-topics: the necessity and sufficiency of dynamic efficiency for the economy to recover from the pandemic, monetary policy years prior to the pandemic, the response of central banks to the economic consequences caused by the pandemic, the exhaustion of financial devices, and reliance on public spending.

The Necessity and Sufficiency of Dynamic Efficiency towards Economic Recovery

“The conditions for dynamic efficiency,” says de Soto “are provided by everything that permits and facilitates the free exercise of (both creative and coordinating) entrepreneurship by all economic agents such that they are able to channel available economic resources into new, profitable, and sustainable investment projects focused on the production of goods and services which satisfy the needs of citizens and are independently demanded by them in the short, medium, and long term.” However, in the kind of economic environment that we have right now all over the world, which is strongly controlled by governments, the smooth and agile formation of prices, which characterize a free society is very difficult to emerge. For this to happen, de Soto argues, “we must liberalize markets as much as possible, particularly the market for labor and other productive factors, by eliminating all of the regulations which make the economy rigid.” He adds that it is very important for the public sector not to waste “the resources companies and economic agents need first,” which are necessary “to cope with the ravages of the pandemic and to survive” and when the economy recuperates later, “to make use of all their savings and idle resources available to bring about the recovery.” It is vital therefore, says the Austrian economist “that we proceed with a general reduction in taxes which leaves as many resources as possible in the pockets of citizens and, above all, lowers as far as possible any tax on entrepreneurial profits and capital accumulation.” Governments should “promote, rather than fiscally punish, the accumulation of capital if we wish to benefit the working classes and, particularly, the most vulnerable.”

Concerning the labor market, governments “must avoid any sort of regulation which decreases the supply, mobility, and full availability of labor to quickly and smoothly return to work on new investment projects.” De Soto enumerates economic policies that are harmful to the recovery of the labor market: “the setting of minimum wages; the rigidification and unionization of labor relations within companies; the obstruction and, particularly, legal prohibition of dismissal; and the creation of subsidies and grants (in the form of temporary labor force adjustment plans, unemployment benefits, and guaranteed minimum income programs).”

De Soto ends the first sub-topic by mentioning the need for reform in the welfare program. Instead of the government, this responsibility must be brought back to civil society.

Monetary Policy Years Prior to the Pandemic

Under this sub-topic, de Soto narrates to us the monetary background of the existing pandemic. He said that Covid-19 emerged in a context, “which central banks worldwide had already initiated an extremely lax monetary policy of zero or even negative interest rates and monetary injections the likes of which, due to their degree of intensity, their widespread nature, and the international coordination involved, had never been seen before in the economic history of mankind.” Such excessive monetary policy had been implemented several years prior to Covid-19. Central banks had utilized such policy using economic recovery and uncertainty as justifications.

Central Banks’ Response in Relation to the Pandemic’s Economic Threat

The reason why de Soto narrated the monetary background of the pandemic is to expose that “central bankers had already practically depleted their entire arsenal of unconventional, ultra-lax monetary-policy tools” prior to the breakout of Covid-19 in January 2020.

Now that Covid-19 is presented as a serious danger to the economy, the solution “of monetary authorities has been simply more of the same” by redoubling “monetary injections even further.” Through this action, de Soto thinks that “central banks have made the fortunes of a few people even greater, while the economy of most citizens is contracting and entering a recession.”

As of January 2021, de Soto reports “that a large portion of the newly created money is already starting to reach the pockets of households directly.” Such increase in money supply and matched with a decline in production due to pandemic will inevitable result “to an increasing upward pressure on prices.” In fact, if de Soto is correct, he said that “the price of agricultural products has continued to rise and has reached its highest point in three years.” He adds, “Freight charges and the prices of many other raw materials (minerals, oil, natural gas, etc.) have also soared, even to record highs.”

Running Out of Financial Tools

Under this discussion, de Soto taunts the “brilliant ideas” proposed by financial experts to address the economic vulnerability instigated by the pandemic. These “brilliant ideas” include zero and negative interest rates, revision of inflation target, abandoning inflation target, and cancellation of public debt. For de Soto, these policies “run the risk of provoking a grave crisis of public debt and inflation.”

The first of these solutions, those of zero and negative interest rates are recommendations “coming from investors, ‘experts,’ pundits, and even the most renowned economic and monetary authorities.” If these policies are implemented for many years to come, “investors can relax and continue to get rich by trading in the bond markets.”

Another device is the “revision of inflation targets to make them more flexible (obviously in an upward direction) on the pretext of compensating for the years they have been unable to achieve them and to justify not taking monetary-control measures even if inflation skyrockets.”

Still another financial tool proposed by other experts is to just abandon “the inflation target and directly setting the target of adherence to a certain curve of – especially low – interest rates (that is, zero or even negative rates for many years . . .” This idea according to de Soto “is applauded by representatives of so-called ‘Modern Monetary Theory,’ which in the mind of the Austrian economist “is neither modern nor monetary theory, but simply a potpourri of old Keynesian and mercantilist recipes more characteristic of the utopian dreamers of centuries past . . . than of true economic theorists.” It is this theory, says de Soto that “is wreaking havoc among our economic and monetary authorities.”

“Cancellation of public debt purchased by central banks” is the last among the “brilliant ideas” that is now “becoming increasingly popular.” For de Soto, its popularity indicates that a growing number of people are anxious “at the increasing signs of a rise in inflation and their accompanying fear that fixed-income markets will collapse and interest rates will go back up.” These people think that “under such circumstances,” it is “crucial that the pressure on wasteful governments be reduced by a cancellation which would amount to a remission of nearly one third of the total debt issued by those governments.” For them, “such a cancellation . . . would be detrimental only to an institution as abstract and removed from most of the public as is the central bank.”

However, in the mind of de Soto, implementing the above proposal is not as simple as these people think. For him, if the cancellation of public debt will be applied, two things will become obvious:

“First, central bankers have limited themselves to creating money and injecting it into the system through financial markets, thus making a few people exorbitantly rich without achieving any significant, real, long-term effects (besides the artificial reduction in interest rates and the simultaneous destruction of the efficient allocation of productive resources).”

“Second, the popular outcry against this policy would be so great were this cancellation to occur that central banks would lose not only all credibility, but also the possibility of pursuing in the future their open-market-purchase policies (quantitative easing). Under these circumstances, central bankers would be obliged to confine themselves to giving money injections directly to citizens. These would be the only ‘equitable’ injections from the standpoint of their effects on income distribution, but since they would lack any real expansionary effects observable in the short term, they would mean the definitive end of central banks’ capacity to influence economies noticeably in the future via monetary policy.”

For de Soto, if this kind of plan is carried out, “the only sensible recommendation that can be given to investors is that they sell all their fixed-income positions as soon as possible, since we do not know how much longer central banks will go on artificially keeping the prices of these securities more exorbitant than they have ever been in history.” And then de Soto mentioned an alarming move among discerning investors is now taking place. He said that “hedge funds and others, by the use of derivatives and other sophisticated techniques, are already betting on the collapse of fixed-income markets while, officially, they continue to leak reassuring messages and recommendations to the press through the most prestigious commentators.” For de Soto such discrepancy between the action and press statements of these investors is understandable for “they wish to get out of the debt markets without being noticed and at the highest price possible.”

Reliance on Public Spending

For de Soto, reliance on fiscal policy and increase public spending are “pro-cyclical” and “counterproductive.” The public sector will absorb funds “and divert scarce resources essential to the ability of the private sector to initiate and complete the necessary investment projects which, because they are truly profitable, can, by themselves and without public aid, generate a high volume of sustainable employment in the short, medium, and long term.” These jobs differ from the kind of jobs depending on political favors “that lead to consumptive public spending, even if on grandiose environmental and digital ‘transition’ projects.” And add to it the fact of “inherent inefficiency of the public sector when it comes to directing resources received and the inevitable politicization of their distribution, which is always highly vulnerable to those seeking the benefits and maintenance of the political spoils system.”

Concluding the paper, de Soto’s final statement combines a word of warning against the danger of interventionism and hope in the capability of people in a free society:

“There are no miraculous shortcuts to overcoming a crisis as severe as the one caused by the current pandemic. Even if governments and monetary authorities strive to present themselves to citizens as their indispensable ‘saviors,’ due to their frenetic activities and efforts in doing apparently beneficial things. Even if all of these authorities systematically hide their intrinsic inability to hit the mark and obtain the information they need to infuse a coordinating quality into their commands. And even if their actions are systematically irresponsible and counterproductive, since they squander society’s scarce resources and preclude the correct allocation of resources and rational economic calculation in investment processes. In spite of it all—that is, in spite of governments and central banks, a few years from now the Covid-19 pandemic will merely be a sad historical memory that will soon be forgotten by future generations, just as no one remembered the ‘Spanish flu’ of a century ago and the far greater toll it took on the economy and the health of the population. Now, like then, we will get through thanks to our individual and collective effort in striving to creatively get our life projects off the ground in the small areas which, in spite of everything, remain open for free enterprise and the uncontrolled market.”

Guide Questions for Discussion:

1. Restate the Austrian Business Cycle Theory in your own words.

2. What is de Soto’s proposal to end the boom and bust? Is his proposal realistic?

3. Restate de Soto’s main thesis in his paper.

4. What does he mean by “economic structure”?

5. What is the difference between the Spanish Flu and Covid-19 in relation to their impact on labor?

6. How about the bubonic plague of 14th century? How does its effect differ from that of Covid-19 in relation to people’s time preference? How does the time preference of people affect both the productive structure and the capital goods?

7. Identify the three effects of Covid-19 on the productive structure.

8. How is uncertainty caused by the pandemic related to the demand for money?

9. What insight can we glean from Mises’ theory about the impossibility of economic calculation under socialism that is applicable in addressing the crisis caused by Covid-19?

10. What are the four factors that demonstrate the incapability of the state to address the current crisis in a dynamic and efficient way?

11. How did de Soto describe the outcome of interventionist policies?

12. Identify and briefly describe other collateral effects of statism.

13. Briefly describe the response of a free society to the challenges caused by the pandemic.

14. Based on Etienne de la Boétie’s essay, what are the four factors that explain the citizens’ attitude of servility and resignation despite the inadequacies, insufficiencies, and contradictions inherent in state policies?

15. What types of public policy must be made in order to provide the kind environment that supports dynamic efficiency towards economic recovery?

16. Briefly explain the monetary background prior to the emergence of Covid-19.

17. How do central banks respond to the economic threat caused by the pandemic? According to de Soto, what are the long-term results of such response?

18. Identify and briefly explain each of the “brilliant ideas” proposed by financial experts in addressing economic vulnerability caused by the pandemic.

19. Reflect on de Soto’s concluding paragraph. What insights can you learn from it?