The coronavirus has not caused lost jobs, closed businesses, restricted air travel, and many other adverse economic effects. Responses to the coronavirus have caused these effects. Were those responses appropriate? We may never know. Responses due to market intervention have been substantially different than they would have occurred in a free market.
It will help to describe the hypothetical response in a free market to properly assess the response based on market intervention. Since free markets do not exist, this is the best we can do at this time.
Two processes — regulation and spending — occur in both free markets and non-free markets. I will first describe how these two processes manifest in a free market.
In a free market, all transactions result from the voluntary interactions of the parties involved.
Some people have the impression that free markets operate with no controls or regulation. Free markets, however, have a considerable amount of regulation. Regulation in the case of a free market occurs as a result of mutual agreement. If a restaurant owner knows about the coronavirus, he may implement a policy requiring customers to wear masks or sit apart from each other. The restaurant patrons can, of their own free will, decide to either patronize the restaurant and follow its rules or go somewhere else with rules with which they agree. Regulation in free markets occurs with no coercion.
Spending (or exchange) in a free market occurs entirely voluntarily. Spending typically occurs with the exchange of money for goods.
In a free market, buyers offer money earned through an earlier exchange. They only have that money because they earned it. They gave up a good in return for a certain amount of money. They use that money, in turn, to engage in our hypothetical exchange.
On the other side of that transaction, the seller exchanges a good that he has for the money the buyer offers.
Thus in a free market, exchanges always occur through the voluntary cooperation of the parties involved.
In a market subject to intervention, transactions no longer occur due to voluntary interaction. All transactions are subject to either force or significant influence.
Under market intervention, regulation no longer occurs due to the voluntary interaction of two parties. Regulation occurs as a result of the unilateral force of the regulator.
Regulators have forcefully closed businesses during this pandemic based on the regulator’s sole judgment. Because of the force behind regulation, it generally has little or no positive effect.
On the surface, spending or exchange under market intervention appears much like it does in a free market. Money gets exchanged for goods. But beneath the surface, the transaction has significant differences.
A government has never earned, as the result of a prior transaction, the money it spends. Governments acquire goods with money that is either stolen or counterfeited.
Taxation entails property confiscation, usually confiscation of money earned through legitimate transactions. Taxation limits the free choice of the people from whom the government steals money.
The other source for government “spending” consists of the artificial creation of money — although legal, this amounts to the same thing as counterfeit. Introducing artificially created money into the system distorts the price mechanism and causes rational people to make poor choices based on false information.
Although it might seem that the seller of goods benefits from this process as much as he does from sales made in a free market, in the long term, these sales may harm his business. In the short term, sales might rise, but the business owner is getting false signals about the strength of his business. He is selling to an entity that has no real cost for the money it exchanges.
In addition to what the government euphemistically refers to as “spending,” we have seen increased government benefits/stimulus during this pandemic. This stimulus may seem like a good thing for the individual, for they can keep their head afloat for a short time.
The money used for economic stimulus comes from the same sources as government spending — taxation and monetary expansion. As alluded to before, these two processes cause a distortion of the resource allocation in otherwise free markets.
The type and quantity of goods purchased due to economic stimulus do not represent voluntary transactions. People tend to spend more with free money than they will with money they had to earn.
In a free market, participants work out the solutions to problems that arise in their businesses, even the existence of a pandemic. They act based on the information they have, and other people learn from watching the results of those actions. Government spending distorts that flow of information.
Market intervention tends to punish the innocent and reward the guilty. The effects of market intervention are broad-based and long-lasting. Although the government stimulus has rescued many people, the artificial transactions caused by the stimuli will have a broader and long-lasting effect than many people realize.
I have only touched on the surface of a very complex question. But all people, whether they benefited from government stimulus or regulation, should at least remain cognizant of the likelihood for future repercussions.