Printing Money Doesn't Work: There Will Be No Recovery Without Production

From an important new essay by Richard Ebeling:

Through most of the coronavirus crisis, those who have made the case for stay-at-home, reduce or stop work, and narrow the range of retail shopping to assure “social distancing” to reduce the spread of the virus have accused their critics of being more interested in preserving livelihoods than “saving lives.” But there is no preservation of any lives if people are not able to produce and work, without which none of the necessities and other wants of any members of society can be fulfilled.  

Listening to many politicians and political pundits, and even some “economists,” you could easily think that 250 years of economic understanding had never happened. One of the oldest of economic fallacies is that money is wealth; that is, the notion that if you create pieces of paper, put some kind of government stamp on it announcing that it is “money,” and spread it around among the members of society, you thereby conjure up from nothing actual material and other forms of wealth. 


Money is a medium of exchange, some commodity or other useful thing that is found widely advantageous to use as a convenient intermediary to better facilitate the exchange of other goods and services one for the other when more direct barter transactions are found to be impossible to arrange or more costly to carry out.  

But increasing the number of units of the particular item used as money does not, in itself, increase the physical quantities of all the other goods that people want to acquire through exchange to satisfy their wants and desires. These other goods that people actually want must be produced, manufactured, transported and made ready in the forms and at the places desired by members of society. They do not fall from the sky and do not miraculously appear by waving pieces of paper money (or their electronic and computer equivalents) above your head after offering some incantation to the “manna from heaven” god. 

This was all understood and even popularized for the general public by political economists in the early 19th century, when “economics” was the trendy and “in” subject about which any publicly minded and intelligent member of British and American society wanted to be knowledgeable and informed. Yes, there was a time, in spite of Thomas Carlyle’s famous quip, when economics was not considered to be the “dismal science.” It was the subject essential to any thinking and thoughtful person to understand the social world in which he lived, and the political and institutional circumstances most conducive to the betterment of the human condition, especially the improvement of the poor...

Maybe because two hundred years ago so many more in the world were still so close to abject poverty – it is estimated that in 1820 the world population numbered barely one billion of which nearly 90 percent lived in serious or severe material want – that most people understood two centuries ago when reminded about the reality of their daily life, that production comes before plenty, that work is necessary if you are to have wealth. This is less the case today when out of over 7.7 billion people only about 10 percent are subject to the lowest of material circumstances, Far too many in 2020 think that the things of everyday life just “somehow” appear and are waiting and ready to be bought if you have but money in your pocket...

What we are witnessing at the present time has been a dramatic falling off in people’s ability to demand desired goods partly due to government decrees, especially imposed at the state levels in the U.S., that have prevented interested and willing buyers from demanding all that they would like to purchase, particularly in the retail and service sectors of the American economy. This has led to a huge rise in unemployment in these sectors of the economy. At the same time, the imposed halting of production except for what state governments have declared to be “essential” manufacturing and supplying has resulted in massive layoffs in, yet, other sectors of the economy. 

In the Employment Situation report for April 2020, issued by the Bureau of Labor Statistics (May 8, 2020), the government’s official measured unemployment rate, for the economy as a whole, rose from 3.5 percent in February of this year to 14.7 percent in April. 

However, there is another measurement used by the BLS known as “U-6,” which includes not only those currently unemployed and looking for work during the last four weeks, but also those considered as only “marginally” in the labor force, as those working part time but who want to work full time, and “discouraged workers” who want to work but have stopped looking for a job. Using this more inclusive measure, the BLS reports that unemployment rose from 7 percent in February to 22.8 percent in April. 

It is difficult to demand the outputs of others, when (depending on the measure) between almost 15 percent and 23 percent of the labor force finds itself not fully employed in the U.S. economy. This is especially the case in what the BLS categorizes as the “hospitality and leisure” sectors of the market, in which the Bureau reports unemployment in April was 39.3 percent.

The government’s lockdowns have, on the one hand, induced declines in production and output, at least in the short run, resulting in reduced supplies of various (though not all) goods. The Bureau of Economic Analysis (BEA) in its estimate of the 2020 first quarter Gross Domestic Production calculates that GDP may have declined by at least 4.8 percent at an annualized rate. 

The restrictions on retail shopping combined with the massive fall in employment has reduced the money demands for many goods and services, and the resources that are used in manufacturing. In the jargon of mainstream macroeconomics, the velocity of the circulation of money declined during the first three months of 2020 by nearly 15 percent (M-2) and by 9.6 percent (MZM), compared to the velocity of money in the fourth quarter of 2019. 

If the lockdowns proceed to be loosened as they are in the various states, and if these trillions of dollars being created by the Treasury through massive deficit spending and through expansive “lines of credit” by the Federal Reserve to support financially ailing businesses proceed as announced, it is difficult not to expect significant price inflation looking to the end of 2020 and into 2021... 

[A]ll the talk about loosening the lockdowns in “steps” over time misses the central point that all markets and the actions of the people in them are interconnected in ways that releasing some while delaying opening others threatens a successful restoring of productions and employments as soon as possible to rapidly escape from the government-created economic chaos in the shortest possible period of time without introducing other imbalances and shortages that need not happen, if not for continuing government involvement.  

What is needed, and now, is the freeing of all markets from the heavy-handed restrictive commands and controls of those in political authority, if we are to restore the economy and the employments it previously and presently could offer to all those looking for work at market-determined wages and prices. Any attempt by those in political power to guide and direct this process, regardless of the reason and rationale, only gets in the way of all the members of the society reestablishing their mutually serving productions as the means for acquiring the supply-side opportunities and capacities to demand the outputs of others

Saving Livelihoods Is “Saving Lives”

In this discussion I might be accused of avoiding why governments have intervened so pervasively and intensely into social and economic activities: to slow down and maybe remove the danger from the coronavirus through society-wide restrictions and restraints on people’s freedom to move, work and earn. That is, “saving lives” by doing all that is possible to prevent or radically slow down the spread of the virus. 

But “saving lives” is inseparable from saving livelihoods. The “supply-side” earning of livings is the only means of assuring that all the goods and services needed and wanted to meet all of our requirements are there when we want them. It enables us to earn the means for demanding what others are producing and offering on the market by having supplied some of what those others desire in reciprocal trade. 

Maybe I lead an especially sheltered life, but it never entered my mind that beer producers might modify their manufacturing in such a way as to be making hand sanitizing liquids, instead, to meet a suddenly much higher demand for the latter product to fight getting or spreading the coronavirus. I had not expected to drop off some shirts at the dry cleaners and discover that the owners were now producing and offering multi-layered cloth face masks on the premises to partly compensate for a large falling off of their regular business.  

An essential purpose of allowing markets to be free and open in all circumstances is precisely to take advantage of what people can imagine, create, and produce to meet changing patterns of demand in their respective corners of society in ways that others might not and, indeed, cannot anticipate. The sudden anxieties in February and March about there not being enough ventilators to meet hospital needs for potential cases of respiratory failures due to the virus, saw numerous improvisations of workable substitute ventilator devices of different types, if the need had fully arisen.

As Friedrich A. Hayek brought out in The Constitution of Liberty (1960), personal and economic liberty is crucial precisely because we cannot fully know or anticipate what creative minds might imagine, the results of which we will be glad to have and benefit from, but which might never emerge if people are not free to discover and try: 

“Liberty is essential in order to leave room for the unforeseeable and the unpredictable; we want it because we have learned to expect from it the opportunity of realizing many of our aims. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

That is why we need markets to be open and free, now, for people be make their own best decisions about the trade-offs and risks to protect themselves and their loved ones from the dangers from catching the coronavirus, and in that process to free the supply-sides of the market from government shutdowns so people may earn the means of demanding what others produce for a return to the standards of living that are possible even in the face of the current health concerns.  

Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina.

Dr. Ebeling is the author of Austrian Economics and Public Policy: Restoring Freedom and Prosperity  (2016); Monetary Central Planning and the State (2015) as well as the author of Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (2010) and Austrian Economics and the Political Economy of Freedom (2003). And the editor of the three-volume, Selected Writings of Ludwig von Mises, published by Liberty Fund.

He is also the co-editor of When We Are Free (Northwood University Press, 2014), an anthology of essays devoted to the moral, political and economic principles of the free society, and co-author of the seven-volume, In Defense of Capitalism (Northwood University Press, 2010-2016).

The above originally appeared at AIER.