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Coordination Problems in a Post Pandemic World

Summary:
A mantra we have used on this site since changing our name a decade ago is that we study economics as a coordination problem, and we see entrepreneurship as the solution to that problem.  In various works the different authors on this blog have pursued and reported on here, they have studied entrepreneurship in the public, private and independent sector to see how a variety of coordination problems are in fact solved or at least ameliorated.  These are never trivial acts ex ante but often acts of bold courage; of voyages into an unknown and uncertain world. But unless these acts are taken, the coordination problem persists and opportunities for gains from trade and gains from innovation are unrealized.  In short, absent the productive specialization and peaceful social cooperation

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A mantra we have used on this site since changing our name a decade ago is that we study economics as a coordination problem, and we see entrepreneurship as the solution to that problem.  In various works the different authors on this blog have pursued and reported on here, they have studied entrepreneurship in the public, private and independent sector to see how a variety of coordination problems are in fact solved or at least ameliorated.  These are never trivial acts ex ante but often acts of bold courage; of voyages into an unknown and uncertain world. But unless these acts are taken, the coordination problem persists and opportunities for gains from trade and gains from innovation are unrealized.  In short, absent the productive specialization and peaceful social cooperation that is realized when coordination problems are solved improvements in the human condition are lost.  This is not exclusively a loss of material progress, but a loss of all the things that lead to human betterment that material progress delivers for us.

Within the set of serious coordination problems to be address we must include macro volatility problems associated with the manipulation of money and credit, and the corresponding misallocation of capital and labor.  In short, a standard boom-and-bust story in the Austrian Theory of the Business Cycle.  But not all macro volatility problems are money induced distortions and corrections.  One type of coordination problem is the Robert Clower and Axel Leijonhufvud coordination Keynesian type problem, and another would be an exogenous shock such as a natural disaster, or a pandemic.  These external shocks can be, and often are, compounded by errors in the policy responses to them.  When we were conducting the Katrina project at Mercatus, one of the issues we focused on repeatedly was how to try to avoid "compounding the fury of nature with the folly of mankind." Unfortunately, that problem is almost as difficult to manage as the consequences of the external shock itself.

But collective action will be required.  The great economists Thomas Schelling put his finger on this in an interview in the LA Times back in 2005.  As he put it:

“There is no market solution to New Orleans,” said Thomas C. Schelling of the University of Maryland, who won this year’s Nobel Memorial Prize in Economic Sciences for his analysis of the complicated bargaining behavior that underpins everything from simple sales to nuclear confrontations.

“It essentially is a problem of coordinating expectations,” Schelling said of the task that Vignaud and her neighbors must grapple with. “If we all expect each other to come back, we will. If we don’t, we won’t.

“But achieving this coordination in the circumstances of New Orleans,” he said, “seems impossible.”

But, private, public and independent sector entrepreneurs figured creative and clever ways to serve as focal points of orientation for individuals to come back and rebuild in New Orleans.  The task was daunting, but it was not impossible. They solved the coordination problem through ingenuity, grit and determination, and once their bold and courageous acts were taken, others found hope.

I have written here already about the trade-offs, and about expectations, and there are plans such AEIs about how to reopen the economic system after this public health mandated shutdown.  These all must be studied carefully and dispassionately -- without over optimism or over pessimism.  But one thing is clear in my mind, we will need to solve once again a problem similar to what Schelling identified for New Orleans.  If we don't, expectations will guide actors aways from moving in the desired direction. The obvious focal point would be wide scale testing and antibody determinations, and/or effective treatment options so that despite whatever calm analysis of the numbers tells us, folks will believe that they are relatively safe to enter social spaces once again. The existing pressure on the medical system has to be reduced by ingenuity and innovation, not I would argue, by improvements in command and control management. The includes alternative supplies of needed equipment and personnel being guided to most urgent areas, by scientist working hard to discover effective treatment options by repurposing drugs or through creative combinatorial thinking. Again, the coordination problems we are facing will be addressed by creative and clever entrepreneurs (who are also erring but always striving to correct) in the private, public and independent sector.

When these entrepreneurial acts produce results that can serve as a focal point to others that its is within the reasonable calculations to return to social space in which we work, play, and live with one another, then additional work will be required to clean up the mess that the folly of mankind has created in the wake of the tragic fury of nature.  When we embarked upon our study of Katrina we found hope in a classic statement from the great classical economist J. S. Mill's Principles of Political Economy:

what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.

Just in the 20th century economic history of the US, calm resolve may be provided in these difficult times by looking at the economic consequences of 1918-1919; 1952; 1957.  Horrendous toll and tragedy befell so many families and yet economies recover, grow and develop due to expansion of the opportunity for gains from trade and gains from innovation. This doesn't diminish the tragic suffering. Social systems should be judged by how well they minimize human suffering, and instead maximize the opportunities for human flourishing -- that is what striving for a "good society" is ultimately all about.  I hope someday soon we will once again be having very rational yet vigorous discussions about these fundamental issues related to the liberal principles of justice and political economy.

Peter Boettke
Peter Joseph Boettke (January 3, 1960) is an American economist of the Austrian School. He is currently a University Professor of Economics and Philosophy at George Mason University; the BB&T Professor for the Study of Capitalism, Vice President for Research, and Director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at GMU.

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