To get out of this, we need to think like central planners

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Within a few weeks, Australia has grown into a team economy.

Businesses are told whether they can open or not, and how they should act, consumers are subject to formal and informal regulation, employees are ordered to stay home, or, in the case of school teachers, are still ordered to appear regardless of risk.

All this happens against the background of what is considered a market. economywhere enterprises must live or die in accordance with their success in satisfying the needs of consumers, and the unemployed must find work or live in poverty.

The economy in which we thought we lived is one in which individual problems are solved in each case, and nothing resembles a general plan.

At least over the next few weeks, when the economy is closed, policies will be determined as we move forward.

But then the time will come to think about the future and how we will deal with the consequences of the command economy that we have created. It is unlikely that we will be able to return to the economy that existed a month ago.

In fact, the catastrophic forest fire season, which has now been forgotten by COVID-19, has demonstrated that we cannot continue in the same vein.

Economists think like planners

In order to think about how to deal with the crisis in the medium term, it is useful to take the point of view of the central scheduler,

Surprisingly, perhaps this is what economists regularly do, although it is unlikely that any of us supports comprehensive centralized planning.

Idea dealing with economic problem Like unemployment, it is worth asking how a well-informed and purely friendly social planner will cope with this. (To avoid disputes about comparative systems, economists mostly prefer the term “social planner” rather than “central planner”)

There is no omniscient and benevolent planner that exists or is likely to exist, but we can use the ideal planned solution as a guideline for comparing market results.

The famous conclusion from the main economy, with a grandiose name The second fundamental theorem of welfare economicsargues that under ideal conditions and with the correct initial distribution of property rights, completely competitive markets can reproduce any results that can be chosen by the social planner.

But, like omniscient and benevolent social planners, in reality there are no fully competitive markets. So economic analysis involves comparing market results with the unattainable ideal of a perfect social planner, and then looking at policy changes that can bring the economy closer to the ideal.

How the planner will think

How can a social planner respond to the COVID-19 crisis and its limitations?

The planner will begin by evaluating the resources available to the community and the technologies available, which in turn will determine the set of goods and services that can be produced.

By choosing a specific set of goods and services, the planner will decide who should receive them, taking into account the various limitations of feasibility and fairness.

From this point of view, the need for locks in response to COVID-19 represents a step back in technology, making it impossible for the economy to provide services such as food in a restaurant and travel.

As a result, the scheduler faces a number of problems.

First, what can be done instead of these lost services? We can think of examples, such as takeaway instead of restaurant dishes and newsgroups instead of travel. These replacements will somewhat compensate for the shock from blocking, but by no means completely.

The planner then needs to consider the workers and resource providers that produce the lost services.

Can they be re-employed in other areas of the economy? And if so, how? Based on the assumption that the lock will last for months, not years, it seems likely that only a limited redistribution is possible.

Who should bear the loss?

However, some sectors of the economy, such as international travel, are likely to be significantly reduced in the coming years. Subsectors such as cruise shipping will never recover. In this case, workers and resources must be transferred to other areas of production.

The last and most important question for the planner: who should bear the losses associated with the crisis?

In a market economy, those outside the affected sector are forced to do without restaurant food and other services, but can move their expenses to another place or save and spend them later. Losses are incurred by workers who become unemployed, and employers who leave business.

A social planner would like to distribute losses more evenly.

In the absence of an ideal social planner, options available to politicians fall into three broad categories

  • Unemployment benefits and business assistance that require the transfer of resources from the rest of the community (unlike a regular recession, unemployed workers cannot be easily mobilized)
  • requirements for private lenders, such as banks and lessors, to forgive or defer payments
  • transfer of enterprises into state ownership, retention of personnel and work at a loss, which should be performed by the community as a whole

In order to correctly draw up a diagram, we need to spend time after the crisis to think about what the planner will do.

Robotic planner responding to natural language commands

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To get out of this, we will have to think like central planners (2020, March 24)
restored March 24, 2020

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