I think it’s highly likely that the dust will clear eventually and that our economy will come back to life at some point in the next two or three years. I know there are certain disaster scenarios that can’t be ruled out, but I think they are unlikely. I’m not going to guess when things will return to a semblance of normal. Really, no one knows.
The question for now is: what will that economy look like?
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
—Adam Smith, The Wealth of Nations
This is the most famous line from the most famous justification of market capitalism. Smith’s point is that it is individual self-interest that drives the economy. In the next paragraph, he goes on to describe how gains from trade explain the division of labor in a modern economy:
“The certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.”
As I’ve said before, “whenever the butcher, the brewer, the baker, or the invisible hand is invoked, the reader should hear alarm bells going off.” The COVID-19 pandemic provides a particularly stark demonstration of the problems with Smith’s comforting fable and how it is used in contemporary politics.
Our business and household sectors are losing lots of money every day, and will continue to lose money for the foreseeable future. People no longer spend money at restaurants. Restaurant owners can no longer pay the rent or pay back their business loans. Restaurants fire their workers, who lose their paychecks and can no longer pay their rent, or their credit card bills, or their student debt. In an economic crisis like this, the overriding question is: who ultimately bears the losses?
We’ve been through this before. In the 2008 financial crisis, we applied the usual rules of capitalism—unless you were a large bank. Businesses failed and their owners (including shareholders, for corporations) were wiped out. Renters were evicted. Homeowners lost their houses. Investment funds that had bought mortgage-backed securities and collateralized debt obligations lost their money. Workers lost their pensions. Small banks were shut down by the FDIC. Big banks, however, got unlimited cheap credit from the Federal Reserve to stay afloat, thanks the the people we all know.
I’ve been reading a lot of books lately, some of which I’ve mentioned here: The Submerged State by Suzanne Mettler, Invisible Hands by Kim Phillips-Fein, The Wealth and Poverty of Nations (finally) by David Landes, Exorbitant Privilege by Barry Eichengreen, and a pile of books on the national debt and deficit politics. (Despite moonlighting as a blogger, I find books more satisfying than the constant stream of newspapers, magazines, and blogs.) But my favorite book I’ve read in a while is Railroaded: The Transcontinentals and the Making of Modern America, by the historian Richard White.*
For some people, most notably Rick Perry but also much of the conservative base, the late nineteenth century was the golden age: of the gold standard, no income tax, senators elected by state legislatures, and, most importantly, little to no government “regulation” of business. White shows what that world was really like.
My school is on break this week, so I’m taking some time off from now through Wednesday or Thursday. I probably won’t write anything very involved, but I will try to point out a few things I’ve been reading.
On that note, I finally read Amartya Sen’s essay “Capitalism in Crisis” from The New York Review of Books. The article meanders through a variety of topics, but two of the broad themes are: the economic systems we call “capitalist” involve much more intertwining of free markets and nonmarket goods and services (education, health care, pensions, etc.) than most people realize; and we need less to invent a new form of capitalism than to understand better the one we already have.