How to Unfreeze the Post-Pandemic Economy

Article published at the Foundation for Economic Education (FEE) with Aaron M. Lane here


Right now, economies around the world are frozen in an attempt to deal with the COVID-19 pandemic. Governments have pulled every policy lever to keep it that way, for the time being, to limit the spread of the virus. Many people think that the economy will be unfrozen just like we would turn a machine off and on again. But unfortunately economies don’t work like that—unfreezing won’t be nearly as easy as many assume.

Post-Pandemic Economic Growth

In our new book, Unfreeze: How to Create a High Growth Economy after the Pandemic, we argue that unfreezing an economy will be a difficult and painful process. We also provide a regulatory path forward. The post-COVID-19 economy will look very different to the one we knew before. But no one can know how different it will look. That new economy will need to be discovered by entrepreneurs, and in a regulatory environment that lets them do so. Unfreezing requires a fundamental rebuild of our regulatory system—and that rebuild should be geared directly at powering up entrepreneurs to discover a post-pandemic economy.

It is easy to imagine an economy is simply made up of land, labor and capital resources. Those are the things we can see and touch. When you think of an economy in this way, freezing an economy sounds easy enough: if we can just keep all the physical things in place—suspended in time—then with enough fiscal and monetary stimulus we can set them back in motion.

But economies are much more complex than that. Economies are—fundamentally—made of patterns of specialization and trade. Those patterns are connected together through contracts and institutions along long globalized supply chains. Those patterns are constantly discovered and rediscovered by entrepreneurs.

Whatever economic patterns we had pre-pandemic are no longer effective post-pandemic. Governments may have frozen the economy, but governments can’t freeze time. The demand side of the economy has and is still shifting. For a start, household budgets have changed (for better or worse). Holiday plans have been cancelled. Weddings have been postponed. Investment decisions have been put on hold. Preferences have changed during the period of isolation. While some households will be more cautious about spending, others will be making up for lost time. These new demand-side priorities will emerge in unpredictable ways.

Out of Sync Systems

On the supply side too, entrepreneurs are tasked with a radically different environment. Many firms that have closed down will never re-open. Existing suppliers and customers will now need to strike new contracts and forge new relationships. Career and educational decisions will have been contemplated during the freeze, most especially by those hit by unemployment. Capital goods and other business assets will be liquidated. Those acquiring distressed assets will put these to new uses. All of this is compounded because economies and businesses will thaw at different speeds.

Our economic patterns are deeply out of sync. Entrepreneurs, not central planners, will bring those patterns back in sync. The unfreezing problem is an entrepreneurial discovery problem because existing patterns will need to adapt to match with post-COVID-19 consumers. It is entrepreneurs who must create the new patterns of specialization and trade that put us on a path to prosperity. Businesses replanning their production processes and hiring decisions will do so under a heavy cloud of uncertainty.

As entrepreneurs adapt, unfreezing an economy will be messy and chaotic. But this mess isn’t solved through more government spending, lowering interest rates or central planning. Governments should aim to create a regulatory environment primed for entrepreneurial adaptation. That regulatory environment needs to be developed around three main principles that rouse entrepreneurship: permissionless innovation, subsidiarity and private governance.

Permissionless Innovation

First, policymakers should adopt a stance of permissionless innovation. We know that the unfreezing should be a process of adjustment and innovation. We also know governments tend to curtail new technological innovations by adopting a precautionary principle. That is, governments regulate, tax and ban new technologies because of the hypothetical future harms (e.g. privacy concerns). They fail to appreciate the prosperity-engine that is technological change, and how that process requires experimentation. By contrast, we argue that governments should enable innovation by default—that is, permissionless innovation.

Regulatory barriers prevent entrepreneurs from adapting. We can’t afford to try and unfreeze the economy in the complexities of the regulatory state. Many pre-COVID-19 economic patterns have been enshrined into thousands of pages of legislation and regulation. To unfreeze effectively, governments should turn to removing many of those barriers that prevent competitive entry into new markets, enabling entrepreneurs to innovate.

Institutional Diversity

Second, policymakers should embrace institutional diversity. When governments across the world froze economies they did so through top-down, centralized government dictates. To deal with the health crisis, blanket rules were applied across entire jurisdictions to suppress economic activity. The approach to unfreezing an economy should be the opposite: we don’t need more centralization, we need more autonomous policy experimentation.

Governments should push decision-making power downwards. That means giving autonomy to state and local governments to navigate the unfreeze. Just as entrepreneurs face uncertainty, so too do policymakers. Just as many entrepreneurs are needed to create new economic patterns, so too is diversity needed in policymaking. This means that the regulatory path out of the pandemic won’t be clean. It will be messy, with different jurisdictions making different choices. But the benefit of institutional diversity is that those regulatory choices will be made with local knowledge of local conditions in mind, tailored to the particular circumstances of each jurisdiction. While enabling institutional diversity and competition pushes up against the rationalizing forces of government—for clean centralized solutions—it propels a process of learning and experimentation in policymaking.

Private Governance

Thirdly and finally, governments should facilitate the emergence of private governance. Comparative institutional economics teaches us that it’s not only governments who provide governance. Individuals also voluntarily come together to provide governance. For example, the emergence of new digital platforms and the sharing economy are centred on governance mechanisms such as reputation ratings. More recently, advances in trust technologies like blockchains present new ways to solve problems privately through technology. These technological advances aren’t just constrained by government regulations, they directly compete with them.

COVID-19 happened on the cusp of a digital revolution. Governments should embrace the potential for new digital technologies to solve fundamental problems—from property registries to self-executing smart contracts—that we were previously done by governments. Relying on private governance drives competition deeper into the institutional structures of the economy.

The principles of permissionless innovation, institutional diversity and private governance provide guidance to policymakers for the pending unfreeze. Ultimately that process should be guided by the understanding that unfreezing an economy is an entrepreneurial process. The role of government is to provide a regulatory environment that facilitates an adaptive and dynamic process.

Unfreeze: How to Create a High Growth Economy After the Pandemic

Book published with the American Institute for Economic Research. Co-authored with Chris Berg, Sinclair Davidson, Aaron M. Lane and Jason Potts

Available at Amazon here.

We spell out the policy settings necessary for the rapid adaptation and market re-coordination that is required to resuscitate the economy. We explain why a return to business as usual is simply not enough to get everyone working again. A period of high growth prosperity will be imperative to deal with the costs of the freeze. This book tackles the tough questions and fills some of the current void of ideas and thinking about economic recovery. We develop a framework and principles for an institutional re-build, presenting a path to recovery based on the ideas of private governance, permissionless innovation, and entrepreneurial dynamism.

“Economies are not like video games that can be paused and then unpaused with no effect. Freezing an economy causes systematic problems, and unfreezing it requires systematic solutions. This book is a much needed well-researched study on what it will take to get the world up and running again.” ~ Jason Brennan, Georgetown University

Blockchain Governance: What We Can Learn from the Economics of Corporate Governance

Published in the Journal of the British Blockchain Association (with Chris Berg).

Abstract: Understanding the complexities of blockchain governance is urgent. The aim of this paper is to draw on other theories of governance to provide insight into the design of blockchain governance mechanisms. We define blockchain governance as the processes by which stakeholders (those who are affected by and can affect the network) exercise bargaining power over the network. Major considerations include the definition of stakeholders, how the consensus mechanism distributes endogenous bargaining power between those stakeholders, the interaction of exogenous governance mechanisms and institutional frameworks, and the needs for bootstrapping networks. We propose that on-chain governance models can only be partial because of the existence of implicit contracts that embed expectations of return among diverse stakeholders.

Blockchain and Investment: An Austrian Approach

Forthcoming in the Review of Austrian Economics (with Chris Berg, Sinclair Davidson and Jason Potts). Pre-print available on request.

Abstract: Investment is a function of expected profit, which involves calculation of the cost of trust. Blockchain technology is a new institutional technology (Davidson et al 2018) that industrialises trust (Berg et al 2018). We therefore expect that the adoption of blockchain technology into the economy will affect investment and capital structure. Using a broad Austrian economic approach, we examine how blockchain technology will affect the cost of trust, patterns of investment, and economic institutions.