How Will We Return to Prosperity?

How Will We Return to Prosperity?

As we rebound from the biggest disruption of the 21st century so far, we must not think only of survival—but of a return to real success.

The COVID-19 pandemic poses unprecedented challenges, not only to our physical and psychological health, but also to the economic health of our society.

One of these challenges is differentiating between the current pandemic-caused economic crisis and the economic crises of the past. The measures taken to mitigate the current economic downturn are often compared to measures taken in past recessions, and many current policy actions imitate past policy actions. But the previous recession reflected the internal disintegration of the economy, arising from the endogenous forces of declining demand and income. The current downturn, instead, reflects disintegration imposed from outside—by the contagion and by policy directed at maximizing social distance, which is a major part of the cause of the decline. Thus, current policy cannot simply imitate past policy, and must account for this external disintegration factor.

Another challenge is the performance and stability of the institutions—markets, firms, social norms—that have evolved to support economic life. The current external interventions suffer from three shortcomings that may have unintended and long-lasting negative consequences on the performance and stability of these institutions.

  • First, the policy response aims at reducing to zero a single risk factor—the intention to maximize survival from virus infection—ignoring a multitude of other risks, economic, social, and deaths due to the lockdown.
  • Second, policymaking targets short-run aspects of the pandemic by means of extreme and open-ended interventions, ignoring preparations for an orderly post-crisis resumption socioeconomic activity.
  • Third, policymaking has taken the form of central command–style action, which is inimical to the freedom that energizes the core of human social and economic betterment.

“Thrive-ability” and not only survivability must be part of our vision of the future. At the time of this writing, in the midst of the pandemic, the public vision is hyper-focused on social distancing and the gloom and doom of contagion. But a successful policy should envision a path to prosperity, not only to survival.

Three Suggestions for Facilitating Economic Recovery

We thus make three suggestions to facilitate a recovery that supports long-term success in the future.

The first is to begin to reopen markets quickly by setting individuals free to return to their activities, as long as they do not present an immediate risk according to well-established medical standards. This policy minimizes survival risks while reinstating some of the freedom that markets require to do their work.

A second suggestions is to create and communicate an explicit timeline for a return to full normalcy, and to delineate the tradeoffs involved. This focuses thought and action on finding pathways to normalcy that encourage the public to make their own decisions, in their own way. It nudges policymakers and the public to embrace a more dynamic vision, and to account for the long-run ramifications of short-run interventions.

A third suggestion is to quickly step back from top-down, paternalistic policymaking that, historically, has not been very successful. Trust individuals and private entities to restart business activity, to set prices and allocate supplies. They did it before, they will do it again. The main task of policy is to allow the return of those stabilizing forces that we had come to rely upon in our pre-crisis daily lives. Under this premise, we should trust that businesses and individuals can self-organize their activities efficiently and address novel risks effectively.

There is no greater engine of thriving and surviving than a free people in self-command of their thoughts and actions, driven by human curiosity and love of life, in commercial innovation, in neighborliness, and in spiritual adventure. It is based upon these principles that the pre-crisis world emerged—and it’s based on them that we will move forward as well.

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Vernon Smith, PhD, and Gabriele Camera, PhD

Vernon Smith, PhD, and Gabriele Camera, PhD

Gabriele Camera, PhD, is Professor of Economics at Chapman University and the University of Bologna. His research areas include monetary economics, macroeconomics, economic theory, and experimental economics. He has studied behavioral aspects of currency systems through an innovative combination of theoretical and laboratory investigation. His work on the spontaneous emergence of money in laboratory economies has received international media coverage. Vernon L. Smith, PhD, was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments with the Argyros School of Business and Economics and the Fowler School of Law, and he is part of a team that has created and will run the new Economic Science Institute at Chapman. He has authored or coauthored more than 350 articles and books on capital theory, finance, natural resource economics and experimental economics.

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