The state strives for power, and what grants power is fear and dependence. The state is making people dependent on it, both as means for control and as an outcome of many policies intended to provide relief.
We have seen a lot of fear and dependence in this pandemic. Fear has been the message that has propelled types of repressive policies that were not possible before. Had anyone suggested only over a year ago that whole countries, democratic European countries, would close down and quarantine people in their homes most of us would have thought him crazy. But it happened. Because fear was drummed up, many populations went along with it. Even though they later protested and resisted, it was too late. Much of the damage was already done. And of course, many feared not only the virus but also the police, which sometimes with enormous brutality cracked down on those seeking a breath of fresh air after weeks stuck in their homes.
It is possible to roll back these policies. However, many of them will need to be rolled back for society to function again. To be clear, it is not possible for the state to keep everybody locked in their homes for long. This is an overreach and points to the limit of the state’s power. When the people rise in opposition, as we’ve seen in this pandemic, the state has no power.
Much more troublesome is the other side of the lockdown and the damage caused to the economic system. Not only were people locked down, but society and therefore practically the whole economy was forcefully paused. The problem here is that there is no “Pause button” for the economy. It may sound easy for politicians, who have no conception of how the real world works. But you cannot simply pause a business. You also cannot pause the supply chain. If you have ever run a business you know that being an entrepreneur is not a steady state but a changing process. It is a constant struggle to get money to come in so that you can cover costs that you’ve assumed long ago. That’s what entrepreneurs and businesses do. They assume costs and imagine they will be paid for their efforts later, and paid more than the cost they already assumed.
In other words, if you “pause,” a business, the costs remain but you get no revenue. How are you going to pay those bills when everything is on pause? You cannot. This is perhaps easy to understand … so easy that even some politicians grasp the concept. So many countries like the United States have offered relief in the form of loans to businesses. Of course, such schemes come with the usual cronyism and favoritism. The loans often do not end up in the hands of those intended. They also shift power and influence away from the market to the bureaucrats in government. Or to put it differently, businesses survive or go under as decided by bureaucrats, not by consumers.
There is more than simply money. Imagine food processing and the beef farmer when the politicians press Pause, which stops businesses from dealing with slaughtering, cutting, processing, and shipping meat. But it doesn’t stop the farming. The farmer’s animals will not stop growing and will not stop eating because the economy is paused. The farmer will go bankrupt because he needs to cover their food, water, and care without being able to sell any beef. Even if he has savings to cover the expense, the meat will lose quality and value as the cows grow older than their prime. At the same time, no meat is reaching the shelves in the stores. So while the farmer is stuck with costs he cannot cover because he cannot sell the meat he produces, consumers cannot find meat in stores. Consequently, we experience a shortage of food, while at the same time farmers and other producers have surpluses that they cannot afford to keep and are unable to sell. What a ludicrous situation.
The effect of this is of course that the farmer will not be able to rise again as the politicians press Play on the economy and beef processing is resumed. He will not have been able to make those continuous investments in his business in order to meet future demand for meat. After all, he was stuck with additional costs and no revenue. So pressing Play will not solve the food shortage.
The same story can be told for other types of businesses as well. You cannot stop the freighter that is on its way around the world. You cannot store logs of timber waiting for the sawmill. You cannot pause mines and smelting plants. And if one task can be paused, it affects the other task in the supply chain. The longer the lockdown, the more businesses would have failed and the supply chains lain in shambles. This is an enormous loss. While it can be rebuilt, it can only be so at an enormous expense. And it still requires that there are people with the know-how and willingness to start such businesses again. Can we rely on them to rise and try again, even after they have been crushed?
The long-term effects of this madness have yet to be seen. Even if the virus disappears tomorrow, these problems will remain. They take time to be resolved and it takes lots of work to piece things together again even if it is all possible. The issue here is that this would be a very bad situation if it were a sudden shock to an otherwise free market economy.
This is not the case. These Western nations were hardly free market havens. Rather, they were welfare states to varying magnitudes. In the case of the United States, a welfare-warfare state. In other words, these societies and economies were already burdened by large and very costly states which were usurping what the market was allowed. What this means is that the market that existed was already burdened by financing the nonmarket.
The state costs money, but the greater burden is loads of people that it relieves from the discipline of the market. In the purely free market, you are paid in accordance with your contribution to the value facilitated to the consumers. To put it bluntly, if you produce lots of value you get paid a lot. But if you produce nothing, that nothing might be your wage.
Of course, there would be systems and institutions in place to care for those in temporary unemployment and those with lesser fortune. But they would be the exception to the rule. Most people would be able to find a job but would be paid what is not called a living wage. Prices are overall much lower when we are all producing, which means our wages can buy many more goods and services. It would be an easy burden to carry and to care for those who are in need when most people can care for themselves. It can be done and voluntarily. And this used to be the case. With cooperative unemployment insurances and collective sick pay funds, where workers share their risk, that was the case. When the state monopolized these services, it also made them more general, and offered them for “free.”
The incentive became to exploit the system as much as possible rather than contribute to but otherwise stay out of it out of respect of your peers. People were trying to stay away from burdening others. Now it is the other way around. This has increased the burden and therefore the cost, and also taxation. Then, the state hires more people to administrate these systems. This was in the beginning, but it has been going on for many decades. The state is an enormous enterprise throughout Europe and the West and much of what it does is to undermine the market by creating incentives to not work, to not produce, and not contribute to joined welfare. The result is that big parts of the population do not actually contribute to the wealth of the nation. This does not only include the sick, elderly, and those exploiting the system because they can. It also includes everybody working for the government, who are in fact living off the production that takes place in the market. The government does not produce any value.
While the cost of the state is typically counted towards the county’s GDP, it would make more sense to subtract it from the value created in the market. That will give us a good idea of the soundness of the economy. How many economies in the West do you think create more value than they use up? With this enormous burden on the economy, the chances of entrepreneurship to be at all successful diminish. Even to start a business that puts enough food on the table is very difficult. It is made much more difficult because of the levies, taxes, licenses, regulations, and so on that politicians and bureaucrats force onto the entrepreneur and private businesses.
In other words, many opportunities are simply not valuable enough to cover the extra burden placed on entrepreneurship by the state. So they remain unexploited or underexploited. This reduces the number of jobs in businesses, which leaves even more people without the possibility to make a living. And so, they seek help and therefore become embedded in the state system. The only way out is to find a job in one of those businesses that are unlikely to be started because the state has made it all too burdensome to run a business.
For every person who no longer works and makes a living, and thereby no longer contributes in the economy, there is a loss of one in production and an increase of one in burden. For every person who loses their job and becomes dependent on the unemployment benefits and other subsistence, the economy both loses production and must carry a heavier load. As a result, the economy becomes less lively and exuberant. There is less entrepreneurship, there is less production, which means there are fewer opportunities for people to find jobs. They become ever more dependent on the state.
This dependence is a problem for many reasons, especially when people become dependent on the system in the long term. As a brief stop to get on one’s feet, the system would do only little harm. It would do what private systems used to do. But that is not how these systems work, especially when the state becomes an ever-increasing burden on value creation and the market. People get stuck in the system because there is rarely a way out and because the systems have been designed to be generous. They are not punishments after all.
Politicians pride themselves on promising that you will not need to lower your standard of living much when you lose your job. It is a great way to get votes and it makes you look generous and caring, but it is utterly destructive to pay people as much for not working as for when they contribute to our society’s overall well-being. When people get stuck in these systems it affects their self-esteem. The longer they remain in these programs, the smaller the chances they have a skill or value, a means to contribute, that they can do something that is still of value. They lose hope, they lose confidence, they become fully dependent on the state, and not only financially. When they start believing that they cannot make a living on their own, that they cannot take care of themselves and their families, and when they conclude there are no jobs for people like them, that’s when they become lost and stop trying. After all, what is the point?
People in this terrible situation are much more likely to be hostile toward those who are not giving them a chance, that is, businesses, entrepreneurs, the market. They are more likely to use their votes to benefit themselves, for which you can hardly blame them. The burden of the economy rapidly increases, which causes greater problems and more people dependent on the state, and even fewer in positions in which they actually contribute. Add to this situation, which existed before the pandemic, the mass death of businesses following the disastrous policies adopted to “fight the virus.”
The farmer in my example will not be able to rebuild his business. Even if he could afford it, why would he choose to build again what was once destroyed? No one will thank him. And it may be destroyed again. Why would he put in all that effort and shoulder that risk when there is little to no gratitude for what he does? There might not even be much profit. So, resentment builds, the burden increases, it becomes harder to start and run businesses. More people become dependent on the state and thereby add to the burden to those who are not. This is a recipe for disaster because it leads us down only one path, which Hayek referred to as “the road to serfdom.” The state grows like a disease in a body that is not healthy enough to withstand the attack. Politically, this is a path to the all-encompassing state—totalitarianism.
The state needs and is granted more power as more people become dependent on it. That is the sad truth and that is what we are seeing. Those depending on it are all too willing to grant a little more to get the system fixed. The problem, however, is not the inability of the state. The state never has such ability. The problem is a lack of market, and this lack becomes more present the more the state grows. This is the reason for pushing harder against the state, but for most the incentives are exactly the opposite, to ask for more. This is what we are dealing with and why we must break people’s dependence on the state.
This lecture was originally published by the Austrian Economics Center.