The Coronavirus and the end of the traditional economy

Because standard economic theories have no answers to this type of crisis.

The coronavirus pandemic has dramatically disrupted the social patterns and the daily economy of societies around the world. Economists are focusing on the economy and what central banks and governments should do in response to an unusual simultaneous disruption in supply and demand. There is a consensus that governments will have to support businesses and workers who are losing income (or risk dangerous ripple effects on banks and the real economy) and find a way to finance these expenses.

It is urgent to step up the production of essential products such as fans, gloves and masks. We need to provide hospital beds. It is essential to ensure that the necessary personnel can work safely. Despite the disruption of supply chains and population restrictions, essential goods and basic services must be provided.

These circumstances raise fundamental questions about the role of the market and the public sector. Especially in doing what is necessary on the required scale and with sufficient speed. Some economic thinkers are rightly attacking these problems urgently.

But the coronavirus also requires us to rethink the economy from the ground up.

Economic discipline provided the most influential framework for thinking about public policies, but it has proved inadequate both in preparing for the current emergency and in coping with it. The coronavirus pandemic underlines the need for a rethinking of our ideas about the traditional economy and points to some directions that this rethinking should take.

Public interest and rational choice

Conventional economists conceive the actions of individuals who propagate an infectious disease as an "externality" in the form of a risk of infection. It may be reasonable for an individual to judge that an interaction with another specific individual is at risk for both of them. There isn't much to say here. The problem comes later. The externalities can be such that some are damaged or all are damaged. The current pandemic affects aspects of both of these cases, but in both cases a rethink is needed.

As death rates from the current pandemic are vastly greater for the elderly, and young people often suffer little direct harm compared to the benefits they receive from an uninterrupted life, a framework for making public health choices in the current pandemic must go beyond the question of whether everything can be improved e instead, undertake interpersonal well-being comparisons to determine whether the benefits of a specific action for some outweigh the losses for others. Most conventional economists studiously avoid such comparisons, instead focusing on efficiency considerations that rank results only based on the fact that everyone has improved by a policy. In this situation, such an approach will lead us nowhere.

The Economist Lionel Robbins he has notoriously attacked interpersonal confrontations as issues of the "mors tua, vita mea" type. But in this case it could be “mors tua, salus mea”, understood as well-being. Interpersonal comparisons allow us to judge whether any further loss of life of some can be considered greater than the inconvenience and economic or social damage, possibly even serious, suffered by others.

A pandemic allows us to understand why it is absolutely necessary, even if anything but simple, to evaluate the interests of different people.

Such comparisons can obviously be complex. At best, deliberate public deliberation on them can provide some social and political legitimacy. Drastic decisions by Europe and the US to stem the pandemic so far seem to have gained public support, without much controversy. But in the end, the company's deliberation regarding the weights to be attributed to different interests is inevitable. Not just to get them attached, but to ensure that the right compromises are made.

If there is a reason for having restrictions on everyday life in place for an extended period, it must be based on the desire to weigh the interests of different and possibly conflicting people. The case of the requisition of private resources (medical structures, buildings or intellectual property concerning pharmaceutical products, fan projects) in order to serve the immediate public purpose of fighting the pandemic is clear. It can be better understood in terms of exceptional but reasonable compromises between the vital interests of some and the less vital interests of others.

The will and ability to undertake such compromises is inherent in the concept of public interest.

On a more basic level, the coronavirus pandemic also shows the inadequate understanding of individual rationality by the traditional economy. To some extent, controlling a pandemic aims to avoid harmful outcomes for all, at least among those who are similarly positioned in terms of disease risks. To achieve the collective result it is not necessary to depart from individual rationality, as the standard framework would suggest (as, for example, in the famous example of the prisoner's dilemma). Rather, it requires seeing individual rationality differently and more expansively than economists have preferred.

This is not a new idea.

Even before the coronavirus, critics of the close understanding of rationality in economics have long stressed the need to understand strategic interdependencies from a broader perspective. For example that of enlightened personal interest (concept advanced by Adam Smith and recognized by Alexis de Tocqueville but largely fallen into disuse). Similarly, moral philosophers, particularly Immanuel Kant, have pointed out that a reasoned approach to morality required evaluating one's actions based on how they would be judged if undertaken by others. All these thinkers believed that rationality, properly understood, should include reasons that lead away from the relentless and short-sighted search for individual advantage.

Only with this more complete approach to rationality can we make a significant appeal to voluntarily respect the requirements of the social good.

It is interesting to note that in the model most used by policy makers for their response to the current crisis only partial compliance with social restrictions has been assumed. While compliance with such restrictions may be motivated by fear of punishment or respect for authority, it can also result from voluntary alignment. In both cases, the current situation requires that policy makers go beyond the narrow toolbox of traditional economic theory to justify and motivate compliance with public health measures that diminish individual freedom.

Uncertainty, judgment and justification 

A second reason conventional economic thinking offers very limited guidance in the present situation is uncertainty. Economists have long ago made the distinction between uncertainty and risk. The uncertainty it is generally understood as an implicit outcome that cannot be directly assigned to a probability, unlike risk. Economics offers limited resources for understanding how to make decisions in the face of fundamental uncertainty. But an even deeper form of uncertainty is where possible outcomes cannot be easily predicted. Such a wildly unpredictable result has become popular in recent years as a so-called "black Swan".

The coronavirus pandemic may initially seem like a black swan-like event, but it is not: the possibility of such a threat has long been recognized by experts and predicted by many, even for years, even with precision. This recognition led to the discussion of scenarios at the highest levels of governments.

The prospect of a coronavirus pandemic therefore entailed fundamental uncertainty of the first type: an event that could have been anticipated (indeed, it was expected) even if it was not known when and in what form it would happen.

That said, it now seems obvious that the related public health infrastructure has been seriously overlooked. For example, on a global level, WHO, which plays a central role in surveillance and response to emerging diseases, may not have been adequately funded. It is a different matter that the WHO has also been blamed for a poor initial response to the pandemic. So also the national and regional health infrastructures in many countries, including Italy.

Flatten the curve

The fundamentally uncertain nature of the evolution of the pandemic gives rise to continuing profound dilemmas about the so-called rational response of the economy to the current coronavirus emergency. Consider the "flattening the curve" metaphor. The potential results of measures such as the closure of schools and universities, restaurants and bars and social distancing have been supported by simulations which are, inevitably, based on specific hypotheses and limited tests and which mainly focus on one goal: to avoid deaths by disease. The motivation is based on the expected direction of their impact, but what real effect they will have, direct or indirect in society is unknown.

The inadequacy of existing models leads to a reasonable disagreement on the right course of action.

The effects of closing borders and closing many aspects of daily life fall on other aspects of physical health. The coronavirus economy has effects on mental health, sociality, economic prosperity. There are also effects on public finances, education, births, death rates. All of these factors add to the uncertainty. Each of these relate to the others in complex ways. The effects of such policies are difficult to know. Some policy effects may be persistent or permanent. Others can be temporary but highly destructive. The plausible chains of causation are different.

The late sociologist Ulrich beck, who spoke of the emergence of one "Company at risk" which generated "evils" and "goods", distributed according to chains of causality often unknown or unknowable, was not far from the mark. The need to take appropriate measures to stop the disease must be balanced by our awareness that we do not know and cannot know everything we need to know to make informed decisions. Although a public health emergency highlights the need for executive powers and the need for expertise, it also highlights their limitations. In a democratic context, public decisions must be supported by judgments capable, in the light of day, of being supported by reason and supported by social deliberation. Judgment must therefore be combined with justification.

The uncertain nature of the impact of the coronavirus and its evolution will affect the private sector economy, and this in turn must be taken into account by public policy.

Ellsberg's famous paradox has shown that individuals have an aversion to uncertainty. In a situation where both the “state space” describing possible events and the probability of being connected to each of these events are unknown, the emotional element in the decision-making process is important. Investors' "animal spirits" come to the fore. For example, although there are rational reasons for the collapse of market sentiment due to the pandemic, the enormous daily fluctuations in stock prices as a result of its consequences appear to be a form of excess volatility that cannot be fully understood as rational.

Public policy in response to the pandemic must focus on providing an anchor and a guarantee to private actors.

This can create expectations of stability so that private actors continue to spend and invest, plan for the end of the public health emergency and avoid actions that could create negative effects, such as firing workers. Panic is itself a risk factor and can be triggered by wrong public actions or calmed by the right ones. Governments can provide support that ensures business survival and continuity of employment and incomes so as to maintain aggregate demand and broadly based solvency and liquidity.

This may require subsidies and direct transfers in order to allow economic activities to continue and avoid irreversible damage. But these are ways to deal with uncertainty, not dispel it. Identifying the necessary interventions that acknowledge the interdependence between public health, economic stability and other factors requires extraordinary public leadership, at a time when trust in government is unprecedented.

The economics of the coronavirus

In general, an economy cannot be separated from society: it is socially integrated. The idea that the economy can be analyzed independently of public health, political or social processes has proved not only simply fragile but false. The coronavirus has unmasked her.

One way to understand this clearly is that the appropriate economic response to the coronavirus depends on what is deemed to be of value. And the values ​​to consider go far beyond the strictly economic one. Reportedly, the former White House chief strategist Steve Bannon, that "A country is more than an economy".

He was right, albeit for wrong reasons.

The global response to the pandemic would have seemed impossible even yesterday: nations that isolate themselves, motivated not by the desire to protect their economies but to protect public health.

Implicit in this overcoming of economic priorities is the importance of an idea of ​​common citizenship and shared destiny. Many companies pay little attention to this idea in normal times. But the pandemic emphasizes that public health is a consequence of economic and social regulations, institutions, policies, rules, habits and provisions. Consequently, state and social action, or lack thereof, becomes fundamental. The impact of paid sick leave or access to health care on the spread of infectious diseases provides examples of how political and economic choices generate the disease transmission belt. An influential idea of ​​economic policy was that every goal requires its tool, but when causal interconnections are deep, the tools must be coordinated. No coordination, no goals.

The pandemic also blurs the dividing line between private and public.

The goal of flattening the curve has been embraced because there are not enough hospital beds, ventilators, and other facilities to care for all potential sufferers at once.

This capacity constraint is, however, the result of previous public and private decisions not to invest in what seemed superfluous to politics.

The current severe reductions in private freedoms, especially those of movement and assembly, and the disruption of our model of life are the result of a previous under-investment. And they will have economic, social, psychological and health consequences. Just to say, changes in the structure of supply chains may also have made it more difficult to produce the medical instruments they needed, resulting in marked inefficiency.

The public interest always goes beyond the private one.

Keynesian economic thinking has long emphasized society's interest in adequate investments. Both public and private ones. The pandemic highlights that this interest can extend beyond how many investments there are and what investments there are. Current efforts to rapidly increase the supply of limiting resources may require public coordination and the redirection of private resources. A pandemic, like a war, makes the difference between the private and the public less marked. It highlights the previously obscured interdependence.

This is not a simple theory. It is a thought that gives meaning to practice, especially but not only in extraordinary times.

A rational response to the coronavirus requires recognizing that interdependencies between spheres of life are as fundamental to the economy as they are to epidemiology. The type of knowledge required requires a synergy between the social and natural sciences. Especially in conceptualizing the public interest. The question is to make sense of the relationship between what is rational when considered individually and when considered collectively. Recognizing the role of fundamental uncertainty and the consequent need for judgment and justification in formulating public policies, after the coronavirus, the economy must open up to new insights and recover old ones.

In short, a rethinking of concepts and methods is very likely. Difficult moments like the present one are only a trigger for change.