ECONOMIC LESSONS FROM COVID-19: WHAT THE PANDEMIC HAS RE-TAUGHT US ABOUT THE PERILS OF PLANNING, THE POWER OF INCENTIVES, AND THE COMPLEXITIES OF EXTERNALITIES.

• Author: Henderson, David R.

ONE OF THE most important things economists can do in a pandemic is not forget what we know. We know that central planners don't have enough information and insight about the lives and activities of 330 million people to plan those lives in a thoughtful way. We know the problems that emerge when you distribute something valuable by giving it away. We know that government officials face bad incentives. We know that externalities pose problems for the straightforward "leave it to the market" viewpoint, but that large government interventions create new problems. In the rush to make pandemic policy, too many of these lessons were cast aside.

ONE OF THE most important controversies of the 20th century was the economic calculation debate. In his 1922 book, Socialism, Ludwig von Mises argued that without markets, central planners would not know how to "calculate." Specifically, they wouldn't know how many of various goods to produce, how to produce them, and whom to allocate them to. In the 1930s and 1940s, Mises' student Friedrich Hayek advanced the argument by noting the ways an economy depends on dispersed information that exists in the minds of millions of people. This information about individuals' "circumstances of time and place," he wrote, could not be captured by a central planner. Hayek's most famous contribution to the debate was his 1945 article "The Use of Knowledge in Society," published in the American Economic Review. That article led modern Hayekians to use the phrase "local knowledge" as a shorthand for Hayek's "circumstances of time and place."

By the end of the Cold War, most economists--even some socialists--were acknowledging that Mises and Hayek had won the debate: The Soviet planners had failed because they had embarked on a task that could not succeed.

But in the COVID-19 era, a lot of policy makers have let this lesson slip their minds. While few have advocated full-blown state socialism, many have forgotten the more general truth that officials don't have enough information to make detailed plans about people's lives.

Take Gavin Newsom, the first governor to impose a statewide lockdown. The California Democrat listed 16 infrastructure sectors deemed so essential that they would not have to lock down. Restaurants, hairdressers, gymnasiums, and schools, not being among them, were compelled to close. So were large swaths of the retail economy. But Newsom did not base these regulations on a sophisticated understanding of what is essential and what is not. He couldn't. No one has that understanding, for the reasons Hayek laid out long ago. The list of essential industries came from an old script; it was not highly correlated with the relative value of various industries and was not closely based on risks of spread.

What was missing from the discussion is something known only in the minds of the humans involved: the value of what was lost. Measuring the loss of gross domestic product (GDP) doesn't quite do it, because the private sector component of GDP is valued at market prices but the value consumers put on goods and services typically exceeds the sticker price. (Economists refer to the value minus the price as consumer surplus.) Gatherings of more than a few people at funerals, for example, were prohibited; many mourners surely valued the gathering they had to miss at more than the ceremony's price.

Central planners tend to come up with one-size-fits-all policies even when the evidence shows a large range of "sizes." With the lockdowns, the most extreme instance of that may be the decision in...