Mises Can Teach Us to Solve the Shortages: A Case for Coronavirus

Governments have various ways to control the markets and attempt to preserve equilibrium. The most familiar one is price-fixing1 and punishing the infringers by reliance on governments’ forces. The rationale behind this is that governments will allocate resources to the best interest of the community and, as they have authority, they can easily mobilize the resources to provide the statist approach.

As a matter of fact, humans deal with scarcity every day and it is not possible to produce a sufficient quantity of things everywhere.2 That is why many people believe that the governmental supervision on the market, controlling the level of supply and demand, and regulating the market to fix the potential failures, are not only necessary but also efficient. Ludwig von Mises stipulates:

In the eyes of all reformers such as Plato, the “body politic” could not operate without interference from the top. Intervention by the “king,” by government, and by the police was necessary to obtain action and results.3

This article is going to answer below the questions posed by Mises’ standpoint here as well as highlight the fact that government intervention in the market is destructive, and not necessary. It will also consider to what extent the government can interfere in the market, and whether such interference aims at the government’s discretion.

The shortage of face masks and sanitizing products due to the spread of coronavirus in Iran is an opportunity to experiment with the efficiency/inefficiency of the tools used by statesmen. In this case, the government envisages a contradiction between securing the free market and the satisfaction of consumers. The government believes that despite the possibility of higher prices in a hampered market, the lower price of face masks is vital to procure them for the consumers in an unhampered market.

Currently, there are 15 producers of face masks in Iran with the capacity of producing 1.5 million face masks per day, in particular, they can produce 300,000 pieces of Nano face masks daily. In a free market, according to Mises:

…the economic calculation in the form of market prices provides the method through which entrepreneurs are able to estimate potential profits and possible losses from alternative lines and methods of production. Through this process, waste and misuse of scarce resources are kept to a minimum, so that many of the most highly valued goods and services desired by consumers may be brought to market.4

Hence, the producers, when considering the increased demand for face masks in the market, would be interested in investing in new lines of production. The main fact is that there is no special difference between face masks’ and pens’ economic rules of production.

In spite of this fact, the government, by considering its mission to engineer the market and protect consumer rights, has promptly intervened in the market and fixed the price of face masks based on its own calculation. The Consumer Protection Organization has officially determined the price of face masks to be dramatically different from the market price. In line with this pricing, the government has banned the exportation of face masks, (the same act has been taken by China, Germany, Russia, and Taiwan) and sanitizing products in order to feed the internal market and eliminate the shortages.

According to this decision, no face mask can be sold higher than the given ceiling. This price maximum makes the market unclear and the demands exceed the supplies. Hence, the scarcity of face masks at that price leaves the consumers unsatisfied. Further, the number of hoardings, smuggling, and the tendency to create a spontaneous black market would increase. At this stage, the second tool is used by the government. The government has confiscated the property of hoarders and threatened them with severe punishments such as execution.5

However, even in an optimistic view, the shortages in the market cannot be eliminated by this leverage, and the negative externalities of the intervention have prevailed. When the pricing signal is disrupted by the government’s spending or price-fixing, market actors mistakenly prioritize the market needs and allocate scarce resources to less urgent needs. Mises emphasizes that:

There the economic problem is to employ these factors in such a way that no unit of them should be used for the satisfaction of a less urgent need if this employment prevents the satisfaction of a more urgent need. It is this that the market solves in determining the prices of the factors of production.6

To conclude, it is a prima facie fact that interventions of the governments to provide required medical devices such as face masks and to foster the positive externalities of people’s precautious actions not only deteriorate the market but also do not achieve the intention of the governments.7 Hence, it seems that the government has no specific role to provide such products for consumers. Nor does it have the rationality to interfere in the market and aggress against individuals’ rights in order to dictate what their experts’ desire. By contrast, the government should permit the media to provide reliable information regarding the virus as well as promote alternative ways of protection instead of leaving them to purchase highly-rated face masks.8 This can be achieved by not intervening in the market and sending a false signal about the price.