Can an economy be rebooted like an iPad? Some seem to think so. That belief is used to justify the isolation imposed on social and economic life during the COVID-19 pandemic these last few months, and it may be used to advocate future shutdowns of uncertain duration and scope as well.
But the economy is not a machine that smoothly reboots by flipping a switch. Its operation results from the uncountable human actions by millions of individuals, each with their own desires, fears and beliefs. This complex process is imperiled when people cannot find a way to cooperate with each other of their own free will.
History and laboratory data teach us that the unwritten rules of cooperation rest on two fundamental principles: beneficence and justice. Adam Smith, the 18th-century Scottish economist and moral philosopher who was famous for his clearheaded thinking, concluded, in “The Theory of Moral Sentiments” that these are the two essential principles for a peaceful and prosperous coexistence.
Beneficence means that if someone — a neighbor, a friend, a stranger — intentionally performs a service or favor for you, then you feel a spontaneous obligation to reward that action or to return that good favor. For Smith, reciprocity in human sociability has deep roots in the human capacity for mutual fellow-feeling or sympathy. It is precisely this basis for community that motivates economic exchange and market activity.
Justice underlies the notion of security from intentional injury. Simply put, justice is what protects us from the encroachment of others and the government on our right to interact freely, to enjoy the fruits of our labor, including property. A society may rapidly disintegrate if individuals believe that others — be they private or government entities — are ready to hurt, injure or unreasonably constrain them.
The lockdowns already imposed and proposed for second waves, or other potential pandemic responses, can interfere with these two principles. We see consequences. The protests and riots we have witnessed are not merely coincidental to yet one more act of police brutality, but they come after months of economic and social isolation from the novel coronavirus have cast shadows on the economic future of many. Reports of increased domestic violence and emergency calls to suicide hotlines confirm this distress. In some ways, to choose a certain policy prescription is to choose who is more likely to die.
Continued lockdowns are infeasible; somebody must produce essential food and services for others.
So what kind of policy should guide the recovery phase in order to be consistent with beneficence and justice? We believe it is a policy that quickly stabilizes economic freedoms at pre-crisis levels, ruling out future open-ended closures of entire economic sectors. And we believe that two main results will follow from this policy:
First, it provides the much-needed stabilization of current production and income across all segments of society, along with expectations for stable future employment. It restores to individuals the freedom and ability to control their future economic life.
Second, it raises the probability that businesses across the board will survive. This addresses an important shortcoming of the initial government response. Raising the probability of survival for all businesses nurtures valuable business and social networks which are fundamental for commercial and financial activity.
Moreover, it gives individuals and businesses a wide planning horizon. A large body of laboratory evidence indicates that when we mix self-interest with narrow planning horizons, we end up stunting beneficial economic activities in society. A clear and wide time horizon prevents undisciplined cascades of myopic, opportunistic behavior that would negatively reverberate through the entire economy.
The unwritten rules of cooperation rely on the principles of beneficence and justice. These two principles should guide us through the fog of fear and uncertainty, to help restore economic prosperity.
Gabriele Camera is professor of economics at Chapman University and the University of Bologna. Vernon L. Smith, professor of economics and law at Chapman University, is a member of the board of directors for the Mercatus Center at George Mason University. He was awarded the Nobel Prize in Economic Sciences in 2002.