Power & Market

With the spread of the coronavirus, leaders across the United States are dipping into their governing toolboxes—treasure troves of both so-called legitimate and usurped power—in order to attempt to stop the virus’ spread. The federal government has suggested social distancing and quarantining, while states have simply imposed compulsory mandates. Some cry that it is a necessity for the state to intervene, and that the market could not accomplish these measures. This begs the question of whether these measures could occur in a stateless society. Although the measures seen in the present crisis are indeed forced by the arm of government, certain market actors could create the same quarantine conditions, although perhaps not to the same extent. To clarify, none of this is to express a value judgment on the effectiveness of quarantines, only that they could be implemented without a state.

First, let us define what is meant by a “stateless society.” In a broad sense, it is a society that lacks government with an monopoly on the means of coercion. A working stateless society would rest on contractural property rights. In the absence of the state, many individuals would opt to live in contractual communities with rules. In such an order, market actors such as private defense agencies would maintain order through the protection of property rights. The arguably useful aspects of government could easily be performed by market actors seeking profits and therefore striving to provide the best for the consumers.

If there were a lethal threat such as a pandemic, the inhabitants of these property rights–based communities would be unlikely to allow free entry if it were not already prohibited.  In the case of a pandemic, the incentive to restrict entry to either individuals’ property or contractual communities would be sizable, effectively leading to self-quarantine for the community.

Though individuals would not find themselves on their own property at all times, each property would have an owner, and they would be pressured to protect those on their premises. This happens on private property today. In the current crisis, nursing homes, housing those most vulnerable to the virus, were already taking precautions and restricting entry before government took action. Some retailers in the United States are implementing precautionary measures to best protect their customers, such as experimenting with “one-way” aisles in order to minimize the risk of customers crossing paths and transmitting the illness. More extreme cases include limiting the amount of shoppers in stores. In the competitive marketplace, producers have a high incentive to attract buyers, and in a pandemic, such precautions would reassure the worried public. Obviously, not all retailers are taking voluntary steps in attempt to stop the virus’ spread, and the same retailers likely would not do so in the absence of the state; however, depending on the hysteria of the masses, those who took the precautions would appear better in the eyes of consumers. If there is a high consumer demand for protection from the illness when shopping, there will be a high profit incentive for retailers to enact the protocols.

Firms specializing in protecting individuals and their property would also take steps to stop a virus’s spread. Today, the firms whose sole purpose is to mitigate losses are insurance providers, and without government their roles would become more prominent. Not only would they pay for losses, but they would have a high incentive to prevent them in the first place. A pandemic concerns illness, and health insurance companies would be the most likely to be affected. In order to maximize their profits and minimize their losses, these firms would take as many precautionary measures as possible in order to prevent a disease’s spread. Since such companies operate under contractual agreements with their customers, they could not simply raise their rates in response to the contagion. They could, however, offer lower rates new customers willing to quarantine and higher ones to those who are not. The firms could entice existing customers with less expensive alternative plans with a self-quarantine requirement. If clients so desired, they could switch plans; the old contract would be dissolved and the quarantine would be required.

It may be objected that this kind of contract would require a state-like, coercive surveillance apparatus to enforce. However, this objection is misguided and ignores the operation of the preexisting status quo: insurance comes with conditions. Suppose someone purchases insurance for their home, and their insurance provider prohibits certain objects—trampolines, for instance—on the premises for liability reasons, as is commonly done. The provider would not incessantly fly surveillance drones over the house, but if a trampoline were spotted under normal circumstances, the property owner would be in violation of his contract and would suffer the consequences. Likewise, in the stateless society, if a buyer has agreed to a condition of quarantine and accepted the cheaper rate, and then decides to have a frivolous night on the town, if caught, he will be in breach of contract. Insurance providers could theoretically track those who break the quarantine, such as by creating a reporting system among the less essential businesses. In more extreme cases, as part of the contract, the firms could require permission to track the customer’s movements in some capacity. Certainly, the methods used by the firms could become highly invasive—if not voluntary tyranny; however, in order to attract more clients, competing firms would attempt to ensure customers’ compliance with the least invasive means possible.

The concept of the insurance firm–enforced quarantine can be applied to production as well. At present, many producers seeking to attract the best workers already pay for their employees’ health insurance. The insurance provider could use the same techniques—stipulating quarantine measures in new contracts or offering alternatives at a better rate—on firm owners, except it would apply to the operation of the firm. In order to keep costs down, precautions against the disease would be encouraged, such as having employees work remotely whose jobs could be performed at home. Production might be rearranged for more space and/or isolation to prevent transmission, and in some cases, employees might be laid off. Although the methods seem unkind to workers, the employed are not working specifically for insurance benefits but for wages, and it is the company and not the worker who secures coverage. It is also important to bear in mind that the firm’s goal is to secure the best labor, and that it will therefore seek to minimize labor cuts as much as possible.

It can be conceded these market policies would not be as forceful as those of government. Some may very well accept the risks and forgo purchasing insurance. But unlike the state, these market actors are pursuing profits by solving problems through the most efficient means possible. If quarantines an effective measure, they will be pursued, and if not, they will likely be rejected. Most importantly, on the market, they will be voluntary and their effectiveness will be judged through the market process and not through state monopoly.

To summarize, the present crisis has brought about new state-enforced regulations—stay-at-home orders, social distancing, etc. Many insist that the government swinging into action is not only a necessity, but that the state is the only organization capable of implementing these measures. In actuality, in the absence of the state, different market actors could replicate many of these protocols on a voluntary basis, and on the market, their usefulness would be judged rather than forced.

With many of our readers having more time on their hands while practicing social distancing, the Mises Institute is exploring our online archives and offering topic-specific collections of curated content. This series, we are calling it the "Quarantine Chronicles: A Shelter-at-Home-Series," will highlight essays, articles, and clips that may not be as widely known, but will provide a deep understanding of important concepts and history.

On the topic of praxeology, we recommend some of the following selections:

Long Reads:

• "The Mantle of Science," by Murray Rothbard (from Economic Controversies)
• "Praxeology as the Method of the Social Sciences" (from Economic Controversies)
• "The Fight Against Error" (from Human Action)
• "Economics and the Revolt Against Reason" (from Human Action)
• "Praxeology and Understanding: An Analysis of the Controversy in Austrian Economics," by George Selgin
• Economic Science and the Austrian Method, by Hans-Hermann Hoppe

Video:

• "Praxeology: The Austrian Method" (Hans-Hermann Hoppe, Mises U, 2009)

Audio:

• "Human Action" (Robert Murphy, Mises Boot Camp)
• "A Treatise on Economics" (Mises: The Last Knight of Liberalism, by Guido Hulsmann)
• "Entrepreneurial Super-Intelligence: Praxeology in the Age of A.I." (Hunter Hastings, Mises Weekends, AERC)

Today in stupid lawsuits we have two Florida men suing McDonalds for not giving them a discount for asking for a Quarter Pounder with Cheese without the cheese. They are asking for $5 million in damages. 

As the Miami Herald reports:

The suit claims, "customers have been forced, and continue to be overcharged for these products, by being forced to pay for two slices of cheese, which they do not want, order, or receive, to be able to purchase their desired product."

Having to pay for cheese they do not receive because they asked that it be held off of the burgers, well, they are not "lovin' it," to borrow from McDonald's current slogan....

According to Lavin's suit, Kissner and Werner "have suffered injury as a result of their purchases because they were overcharged, and were required to pay for cheese, which is not a component of either a Quarter Pounder or a Double Quarter Pounder, that they did not want and did not receive."

As absurd as the lawsuit is, there is a worthwhile economics lesson here. The case is clearly grounded in the idea of a Cost Theory of Value, which basically viewed the price of goods as the result of combining the cost of production with enough profit to make the entire venture worthwhile. In the view of Mr. Kissner and Mr. Werner, the fact they are asking for a sandwich requiring one less factor of production means that McDonalds is now wrongly profiting more from their order than a fellow customer who likes their cheese. 

If McDonalds is in need of an expert to debunk this argument, I would suggest Bob Murphy.

As he explained in his excellent article Problems with the Cost Theory of Value:

Fundamentally, the cost theory is deficient because it doesn't actually explain the determinants of market prices. Rather, the cost theory merely explains relationships among market prices.

"Costs" are prices too. To "explain" the price of a $10,000 car by reference to the prices of the engine, tires, glass, and so on, doesn't really explain market prices per se. At best, it pushes back the explanation one step: Why does the engine have a price of $5,000, etc.?

 

Even on its own terms, the cost theory of value (at least as I have summarized it above) acknowledges that the present day "spot" price of a good is determined by something other than the costs of its production. The theory explicitly deals with the cases where the actual market price is either higher or lower than the long-run "anchor" price set by the cost theory, and tries to explain the forces that would move those "aberrational" prices back toward the long-run "natural" price.

The classical economists weren't dummies. They understood that a sudden urge among the public to buy more of a certain good would lead to an immediate increase in its price. But the cost theory could only comment on this situation by saying that the market would tend toward a restoration of the same rate of profit in the industry through an increase in production to match the increased demand.

In other words, the cost theory of value could explain the long-run target toward which the day-to-day spot prices would tend. The cost theory could not explain what actually formed those spot prices on any given day.

Because the cost theory couldn't explain how actual market prices were formed "from scratch," it was useless when it came to non-reproducible goods. Obviously the price of the Mona Lisa, or of an original Shakespeare manuscript, would have nothing to do with the cost of producing these masterpieces.

Cost Theory Has Things Backward

Here we see the methodological problem of the cost theory: By explaining final retail prices through the cost of making the goods, the cost theory implies that economic value is an objective property of physical items that flows from resources into the goods that they produce. In contrast, the subjective value theory of Menger and others starts with the valuation of consumer goods and works its way back through the prices of labor and other inputs accordingly.

When a consumer is deciding on a purchase, the cost of producing the item is usually irrelevant. For example, going along with our hypothetical example above, if a new company decided to use twice as many resources to make an equivalent car, it couldn't charge $20,000 simply because "that's how much it cost."

For a different example, if a farmer discovers a meteorite chock full of gold on his property, he will charge whatever the market will bear for it. He won't sell it for less than other gold producers on account of his virtually zero cost of production.

To put it simply, the fact these Florida Men purchased their Double Quarter Pounder without Cheese shows that they thought the sandwich was worth the price they paid for it. If not, they wouldn't have ordered it. That it costs the store slightly less to make that sandwich than others is entirely irrelevant, which explains why profit margins vary widely on the McDonalds menu. 

Case dismissed.