In order for economic and social systems to be able to function effectively over time, they must be able to adjust to changing conditions. The quicker the better. The ability to adjust rapidly to changes in market conditions means less misdirected investment and production of goods people do not want. Ultimately, this means fewer wasted resources, lower unemployment, better satisfaction of wants, and higher standards of living. It means better medical care and higher odds of survival if you do become ill.
The current public health crisis we find ourselves in is nothing if not a time of drastic and widespread change, requiring all of us to adapt our personal and professional lives in many unexpected ways. Change is coming at us from every direction. The emergence of the highly infectious novel coronavirus was the first shock, but the hits have kept coming as scientific understanding of how the virus operates evolves, and politicians and government agencies take drastic and often ill-informed action in response.
The pace of scientific and political change has been so rapid that we are able to watch the market catching up in real time. Over the past several months, we have checked our news feeds and Amazon accounts. We have been watching to see when we would be able to get toilet paper, what would happen to the temporary excesses of gasoline (could it be enough to trigger a collapse in the global oil market?), and whether hospitals and individual consumers would be able to get enough PPE, ventilators, and testing kits. Will the businesses that we own, work for, or shop at still be there once it is all over? Economic life has rarely been this strange and uncertain.
Still, markets have in general been remarkably well functioning. Standards of living continue to rise and the innovations in technology, medicine, and many other areas have been truly remarkable. And consumer product markets have generally been smooth enough to allow us to take their operation for granted. Like the electricity in your house or the autonomic nervous system in your body, it is very easy to take the functioning of markets for granted until there is a problem. The ability to pick up milk and toilet paper at the corner store is, for the vast majority of Americans, something that we have always been able to count on for our entire lives. No wonder these weeks and months of watching critical supply chains falter has been such a shock. And I have not yet touched on the disruptions to education and the service industry that have impacted so many in the labor force, whether it be a lost job or the scramble to come up with alternative education and childcare options.
Normally the process of market adaptation plays out far too quickly to be noticed. It happens in the blink of an eye, or in the blip of a commodity price. The price of the final consumer good may even rise, but we are accustomed to companies increasing production or new entrepreneurs stepping in long before any serious risk of shortages can affect our daily lives. This is the miracle of the market. Come hell or high water, if markets are given the opportunity to adjust, Paris gets fed.
The Destruction in Creative Destruction
Joseph Schumpeter is far from the only economist to talk about the painful side of market adjustment, but he certainly gave it the most memorable label: creative destruction. The core idea of creative destruction is that innovation and improvement will displace older products and ways of doing things. “The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory… incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Continuous creation, continuous destruction.
This kind of process is certainly playing out right now. It is inevitable in a time of such rapid change that new ideas will emerge, resulting in the development of products and ideas that will come to displace those that were previously favored. But there is another, more general lesson to be taken from the idea of creative destruction: change is inevitably accompanied by both growth — innovation, adaptation, recovery — and discomfort. Right now, we are seeing this process play out at hyper speed. Conditions are changing quickly. This is an opportunity to learn in the sense that even the most painful experiences of our lives can be growth opportunities. However, it is also a profoundly difficult time for many, and uncomfortable tensions are emerging between people who are responding in different ways.
It is easy to take economic change personally, for good or for bad. The loss of a job or failure of a business venture can have a systemic effect on an individual’s life. Further, the interconnected nature of our lives means we are also affected when someone else’s job or business disappears. This can be in small ways, like the company that makes your favorite hair product or breakfast cereal going out of business. But it can also be in big ways. Major manufacturers of important technologies — like ventilators or inputs like compressed air that a variety of industries depend on — may not be able to get the raw materials or distribution they need to maintain production. Patients may be unable to get vital medications because they are suddenly in demand for new uses.
Recognizing the inevitable entanglement of pain, growth, and opportunity can help us understand the tension and change going on in services and social networks as well. To take just one of many possible examples, consider the conflict over the re-opening of public schools. Change is always tough, but some parents — for example, those who already stay home, or work from home with flexible schedules, or have robust networks of friends and family with whom they can “pod” and share responsibility — have been able to adapt with relative ease. For others, the sudden transition to virtual learning represents a major life disruption. Many of the services they depend on have been destroyed. For instance, single parents and families that rely on dual incomes are left scrambling to figure out how to adjust to the loss of in-person schooling, which for many doubles as a massive subsidy in the form of publicly provided childcare. Parents of children who are accustomed to receiving special care for social or physical disabilities may find themselves at a particular loss.
One of the reasons that the transition to virtual learning is so deeply disruptive is that in markets we do not generally see such large-scale change happen so quickly. Piecemeal adoption, as consumers switch one by one from one product to another, allows time for people and supply chains to adapt. It is not obvious that virtual learning is inherently bad, and in fact, it is possible to imagine many desirable pedagogical upsides. But few parents have had enough time to prepare for these changes, get used to the idea of a new way of learning, and to adjust their lives and resources in more compatible ways. Alternative systems for childcare, socialization, and support for children with special needs do not exist yet, at least not on a scale that can substitute for in-person learning. Even parents who were previously deeply critical of the educational quality of public schools may find themselves bemoaning the loss of what they had. It is not that the previous status quo was so great; it is just that they have not had time to get ready for this new paradigm.
Our social networks and support systems have similarly not had time to adapt. There is evidence that fear, loss, and social isolation are having a detrimental impact on mental health for many, manifesting in upticks in anxiety, depression, substance abuse, and even suicide. Another serious social impact of isolation — whether in the form of voluntary caution or in compliance with the abundance of government-mandated shutdowns over the past six months — is that many have lost their escape routes. Being stuck at home can be a recipe for disaster for the vulnerable. Particularly during the most extreme lockdowns, victims of domestic abuse or those dependent on caretakers may have nowhere to go if a relationship turns abusive or neglectful.
With adequate time to adapt, there is much that individuals and entrepreneurs could do to address some of these problems emerging in their lives and in the lives of others. We have already seen some of this, with the increased availability of telemedicine, online therapy, and curbside everything. More time could bring even more dramatic change. When normal social outlets and points of connection are unable or prevented from functioning normally, new outlets often emerge. Churches can re-structure to accommodate multiple smaller outdoor sermons. Welfare organizations (both public and non-profit) can redirect their energy toward more compatible forms of check-in and intervention. Families and social groups can restructure their daily lives in ways that enable them to socialize away from enclosed indoor spaces and put more effort into regularly checking in on each other. We’ve seen some of this, but with more opportunity and time to experiment, what else might be possible?
Markets and Opportunity
There is not much that can be done to get more hours into the day, but there are ways to increase the opportunity to experiment, learn, and adapt. Economics and history contain many valuable lessons about adjustment to rapid change. These lessons can both help us accept our current situation and take action to enable learning and adaptation.
First, we can accept that change and uncertainty are inevitable, if not always so obvious as during the current COVID-19 pandemic. We never really know what the future will bring. During times of rapid change, it can be particularly difficult to imagine what kind of products and solutions will best meet new needs. F. A. Hayek wrote, “If we are to advance, we must leave room for a continuous revision of our present conceptions and ideals which will be necessitated by further experience. We are as little able to conceive what civilization will be, or can be, five hundred or even fifty years hence as our medieval forefathers or even our grandparents were able to foresee our manner of life today.” This idea holds on a smaller scale as well. It is difficult to imagine what life will be like for our grandchildren, but it was also difficult to imagine in July what classrooms would look like in September.
When the new yet-to-be-conceived products, services, and ways of doing things affect areas of our life as deeply personal as our health, our livelihoods, and our children’s education, the fact that we do not yet know the best way forward can be unsettling. Yet, we are not really any less in control than we were before. The future is built slowly, over time, through daily decisions made by billions of people around the globe whom we do not know and will never meet. When we are connected to those other billions through systems that encourage mutual support — such as through voluntary market interactions — we enjoy incredible benefits. We can control our actions and attempt to influence social outcomes for the better, but we cannot control or guarantee results.
Second, the ubiquity of change and innovation has important implications for the way forward. In short, the way toward recovery is the same as it has always been: we need to maximize opportunities for innovation, experimentation, and learning. The most important action we can take to maximize these opportunities is to remove barriers to entrepreneurship. Entrepreneurship is inherent in the human condition. Adam Smith called this our “propensity to truck, barter, and exchange.” It is inevitable that, given the chance, people will do what they can to better their circumstances, including stepping up to produce or distribute products to satisfy new needs and address new challenges. Institutional incentives can direct that energy in either productive or unproductive ways.
A big part of directing entrepreneurial energy toward the productive is by getting out of the way. A market system wherein people are capable of translating their productive effort into earnings that can be used to improve their own lives is the fundamental prerequisite for productivity and innovation. That in itself is not to be taken for granted. However, even with the basic structure of a market system in place, some institutional environments will be more compatible with innovation than others.
The primary obstacles to productive entrepreneurship within a market economy are often regulatory barriers. Some regulatory barriers to innovation have already been relaxed. For example, prohibition-era regulatory relics limiting alcohol sales and distribution have been lifted, as have some of the FDA requirements for pre-market review of laboratory tests. This is a good start. But if we really want to continue to make social and economic progress, it might be time to get radical about lifting regulatory barriers to innovation in all sectors.
Now more than ever, we want people to be experimenting with new ways to educate, to safely meet healthcare needs, and to provide services — from restaurants and gyms to massage therapy and music lessons — in ways that allow life to continue while still helping people feel safe. This would have the added benefit of introducing diversity into many markets that currently satisfy most people while leaving others wanting, including those who are chronically vulnerable to illness. It would be hubris to think that we understand all the supply chains being impacted by the current crisis. Lifting burdens on entry to those industries and allowing change within the processes they use can help alleviate some of that crunch.
In Israel Kirzner’s work on entrepreneurship, he outlines the many ways that a burdensome regulatory state can handicap innovation. In addition to stifling innovation by making it difficult for new providers to enter the market, regulation can unintentionally redirect innovation away from the most pressing problems. By encouraging innovation in some areas and discouraging it in others, regulation handicaps the ability of market actors to figure out which areas to prioritize. For example, governors and public health authorities in many states have published lists of which types of businesses are allowed to continue to operate in-person services and in what capacity. In some of these states, restaurants and gyms have been allowed to reopen with limited capacity, but businesses with similar physical environments but different purposes — like bars and music venues — are forced to remain closed. In contrast with safety requirements, where businesses could decide for themselves whether or not the cost of adaptation is worthwhile, these kinds of orders establish bureaucrats as the critical decision makers about social and economic priorities. This impedes the ability of individuals to communicate directly with producers about which risks are worth taking and where innovation is needed.
Even regulations that effectively solve short-term problems can perpetuate problems in the long run by removing the incentive for entrepreneurs to act. For example, many public schools around the country have been ordered by governors or public health authorities to provide a virtual alternative for their students. This is tantamount to a significant public investment in online learning that may make it difficult for private entrants into the market or for those designing radically new approaches to education to compete with their tax-funded counterparts. This disincentive to innovation could hold back our ability to figure out how to best learn and educate through virtual technologies.
Ultimately, this is not about any one particular barrier to learning and change. It is about the accumulation of regulatory burden in the United States over the past hundred years. All the small, seemingly reasonable steps we ask people to take that make it just a little bit harder for them to change and for newcomers to compete. These regulatory barriers slow down our ability to innovate in normal times, and they slow down our ability to recover and adapt in times of crisis. Removing as many of these barriers as possible is an important part of making sure we are not making a bad situation worse.
Getting through a pandemic was never going to be easy. But it does not need to be this hard. If we put our effort into innovation and the removal of barriers, we can come through the other side of 2020 wiser and more adaptable.
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- Boettke, Peter J. and Ennio Piano. “Baumol’s Productive and Unproductive Entrepreneurship After 25 Years,” Journal of Entrepreneurship and Public Policy, 5, 2 (2016): 130–144.
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- Storr, Virgil Henry and Arielle John. Cultural Considerations within Austrian Economics. Cambridge, UK: Cambridge University Press, 2020.
More Commentary on the COVID-19 Pandemic:
- Coming Back from COVID-19: Lessons in Entrepreneurship from Disaster Recovery Research
- Reassessing the Notion of Work During the COVID-19 Pandemic
- The European Union’s Governance System and the COVID-19 Pandemic
- Doing Bad by Doing Good during the COVID-19 Pandemic
- How Can Economics Help Us to Better Understand COVID-19?
- Native American Reservations and COVID-19: Understanding the Plight of Reservations in the Current Pandemic
- Polycentricity Amidst a Pandemic
- Should We Be Worried about High Inflation from the Fed’s Recent Money-Printing?
- Inequality and Surveillance During the COVID-19 Pandemic
Jayme Lemke is a senior fellow for the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.
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