Hayek vs Keynes in a Pandemic Struck World

Here we are then, nine months into a pandemic and we seem to have gotten used to seeing the number of cases and the deaths roll up, like on a gas-filling machine. Over 31 million covid cases worldwide and just under a million deaths seem to have made us impervious to the dangers of the virus as it spreads from home to home, and city to village. Even our political leaders have stopped fretting about it anymore; most have stopped issuing statements or briefings and updating citizens on the measures being taken to control the pandemic. It’s as if we have resigned ourselves to the worst outcomes.

The first few months saw governments around the world announce massive relief packages to help the unemployed and furloughed, as well as to businesses to keep people in their jobs. Central banks did more of the heavy lifting by pulling out all the stops in funding banks and businesses, so that credit markets would not seize up and money would keep flowing into the economy. Now it looks as though the unemployment benefits are coming to an end. In the US, the benefits ceased on July 31 and in the UK, which extended them, they come to a close on October 31, 2020.

In India, where there is no unemployment benefit to speak of, the central bank has pumped in around Rs 8 trillion and the government also announced several measures to help businesses stay afloat and keep people in their jobs as well as a stepped-up rural employment guarantee scheme. The latter actually became necessary as millions of migrant workers found themselves out of jobs when the nationwide lockdown was announced in March, 2020. India’s record on tackling Covid-19 is appalling, when you consider that we had the strictest and longest nationwide lockdown, as can be seen from the India section on Our World in Data website.

Daily new coronavirus data (as of September 22, 2020):

Despite all these efforts, millions of jobs have been lost across the world, across many sectors of the economy. The effect of the lockdowns can be seen in the April-June quarter 2020 GDP numbers of various countries. Except for a small growth in China, most countries across the developed and developing world have experienced sharp contractions. From a year on year contraction of -9.1% in the US to around -21.7% in the UK and between -10 and -20% contraction in Europe (except Spain which contracted around -22%), the world has taken an economic battering these past months.

India saw the worst contraction in GDP of around -24% and most of it was due to sharp falls in manufacturing, construction as well as services. Private consumption contracted by a third, while gross fixed capital formation fell by around 47%. Only government consumption remained resilient, growing by 16%, as one would expect during a time of crisis.

Many western economies reported a slight uptick in retail sales and consumption in recent months, but that too appears to be short lived. Probably nothing more than pent-up demand. If one considers that people are still losing jobs, and unemployment benefits run out soon, we have to be prepared for falls in consumption demand in the months to come. Clearly the demand side of economies are suffering, even if it was supply constraints that hampered economic activity in the lockdown days of the pandemic.

Politicians in the US can’t seem to agree on how much to extend the unemployment benefits by, and there are said to be some who even believe that extending them would encourage people to stop looking for work. In the UK, it appears that there is no plan to extend the furlough schemes beyond October 31. So, are governments giving up on fighting the pandemic and the looming economic recession?

Work from home becoming the new normal for some; Image: Christopher Montgomery on Unsplash

Most economists, meanwhile, are calling for more relief and stimulus measures to be rolled out, as the effects of the pandemic are likely to last at least until the end of 2021. It sounds like the right time to revisit the need for Keynesian measures to revive demand versus Hayek’s arguments against a centrally planned economy. I had shared my podcast sometime ago on the need for bigger government (in terms of spending and policy intervention) during Covid. However, having just read Friedrich Hayek’s The Road to Serfdom, I thought it might be a relevant debate to raise again in the current context.

First of all, it’s important to note that Hayek’s book was written in the context of the post WWI Weimar Republic economy experience under communist rule and the entire book is a reaction to those years. Strangely though, Hayek was drawing inferences from that experience as lessons for Britain to heed and therefore allow free market economics in its own country. It apparently grew out of a letter from him to William Beveridge in which he expressed his reservations about Britain adopting any kind of centrally planned welfare economics, while Hayek was teaching at the London School of Economics.

What amazes me about the book is that it entirely hinges on a discussion of ideas, ideals and values, with no empirical evidence offered to bolster Hayek’s arguments. There are no economic facts cited and the only historical one is the rise of Nazism and Hitler which too, according to Hayek, was a manifestation of National Socialism. It is a liberal’s impassioned plea for democratic freedom, individualism, and laissez faire capitalism. And while I found myself agreeing with some of the statements he makes about the need for individual freedoms and liberties, I can’t possibly agree with the overall thinking that governments should by and large stay out of managing economies.

Besides, having observed other political economies at work over the decades, one knows that it doesn’t have to be a binary choice between laissez faire capitalism and communism, or even socialism. We have seen most countries in Europe settle for a form of social democracy with government regulation and protection playing its role along with capitalism for over half a century. In India, we have had a mixed economy from the days of our independence with a public as well as private sector coexisting and we have had a centrally planned economy within the framework of a democracy.

Reviving consumer demand will be key during the pandemic; Image: Arturo Rey on Unsplash

As an advertising and brand communications professional who deals with culture, belief systems and values while working on brands, I have been referring to the World Values Survey as well as Geert Hofstede’s cultural insights in some of my posts. I was struck by some of Hayek’s observations in his book, about cultural values.

“There is one aspect of change in moral values brought about by the advance of collectivism which at the present time provides special food for thought. It is that the virtues which are held less and less in esteem and which consequently become rare are precisely those on which Anglo-Saxons justly prided themselves and in which they were generally recognised to excel. The virtues these people possessed – in a higher degree than most other people, excepting only a few of the smaller nations, like the Swiss and the Dutch – were independence and self-reliance, individual initiative and local responsibility, the successful reliance on voluntary activity, noninterference with one’s neighbour, and tolerance of the different and queer, respect for custom and tradition, and a healthy suspicion of power and authority. Almost all the traditions and institutions in which democratic moral genius has found its most characteristic expression, and which in turn have molded the national character and the whole moral climate of England and America, are those which the progress of collectivism and its inherently centralistic tendencies are progressively destroying.”

Most of the book deals with moral and ethical arguments of this nature. For example, when arguing against central planning, Hayek does so on the grounds that planning requires prioritizing between different ends, and that entails assigning values of a higher or lower nature which raises questions of authority and rights. Much of the book came across as not just a liberal’s views, but those of a libertarian thanks to its extreme reactions, which probably explains why Milton Friedman took to Hayek’s views. Hayek even pitches the 1914-18 war between Britain and Germany as one between the competing ideals of Liberalism vs Socialism and not of economic competition, as we all know it.

Right now, of course, we are in a different kind of war. Against a virus. There is not much scope for mobilizing forces of the kind that can revive a war-hit economy. It is clear as daylight to me that governments will have to borrow and spend more to boost employment and revive demand. I am also of the opinion that governments have to have a plan to assist the most critical sectors of the economy as well as those most adversely impacted. By critical sectors, I mean those that have cascading effects over the rest of the economy, especially on the employment front.

Job creation shouldn’t lose momentum; Image: Shawn Ang on Unsplash

America, which practices laissez faire capitalism and Britain might have the hardest time trying to revive growth in their economies. Britain seems to be giving up on welfare economics at a time when it is most required, even though Martin Wolf writing in the FT called UK’s economic response to the pandemic “welfare nationalism”. It looked more like welfare populism to me. And with escalations in the trade war with China, neither are making it any easier for themselves. Besides, Britain is staring at a No-Deal Brexit, from the way negotiations seem to be progressing. France has extended furlough schemes for its workers till 2022 and announced a big economic stimulus along with a plan, according to The Economist. One hopes that the big € 750 billion relief package for the southern European economies will help them recover, though it might not be adequate.

In India, we seem to be more busy fending off China and banning their apps as well as investigating a celebrity suicide case, rather than tackling the virus or the economy. There is no news of any further economic stimulus yet, even after news of the -24% GDP contraction and the highest number of Covid cases (over 5.56 million) and deaths (over 88,000). I suppose we can expect some measures to be announced, as two states go to local assembly elections later this year.

One gets the feeling that political leaders across the world have thrown up their hands in the fight against the virus. They seem to be hoping for a manna from heaven, more likely to arrive in the form of a vaccine. On TV news these days, there is excited chatter only about the race for a vaccine, including one that Trump hopes will be ready just as he goes to the hustings in November. Now, wouldn’t he like that?

For once then in the history of this pandemic, politicians will be listening to scientists.

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