Rethinking economics – what we should learn from the pandemic but probably won’t

I recently published some thoughts on the economics of the pandemic. This wasn’t one of my more coherent offerings, but somehow I needed to break the ice. I wrote about the short-term question of government stimulus. I made a throwaway remark about the pandemic throwing up deeper issues as well. I want to open the box on these, because I think the pandemic has shown the poverty of conventional economics. So here are some early observations

The narcissism of small differences

Economic commentary used to be about small changes to the economic aggregate statistics, such as GDP or productivity. That didn’t prepare us for the earthquake that came. There are some big things happening in the world, and the risk of a pandemic is only one: there is climate change, nuclear proliferation, bottlenecks in global production processes (microchips, rare earth minerals, etc), but we tend to overlook these in a quest for small gains here and there. It seems like an avoidance strategy for not confronting the bigger questions of our time. Above all we need to break away from our obsession with monthly or quarterly or even annual GDP growth. Alas even during the crisis commentators are trying to compare quarterly GDP figures between countries, at a time when they are surely unreliable, where differences in statistical methods between countries are not well understood, and when timing differences between countries on the evolution of the epidemic matter a lot.

Production is no longer central to economic performance

We depend on food, clothing and many manufactured goods, but these represent a diminishing proportion of the economy. Or, to put it another way, these activities only occupy a minority of workers. Manufacturing, by and large, has had a good crisis. Clearly it has been bad for some things, but it has been good for others (computers and PPE for example). Our roads and ports have stayed busy with goods being moved to and fro. But this has still left economic devastation. And yet economic commentators still tend to talk of manufacturing as being central. They fret about barriers to trade, the effect of bottlenecks on inflation, and stagnant productivity. And yet developed world economies have moved on from these things.

An economy where services matter more than anything for the supply of jobs, and health and care services in particular, needs a different mindset from one based on factories and products moving around on lorries.

Most of the economy is non-essential

As we locked down, we drew a distinction between essential and non-essential supplies and services. The former turned out to take up a surprising small share of economic activity, and it wasn’t hard to keep the show on the road. And much of what we deemed essential has a dubious claim to that status (garden centres? – of course that doesn’t mean that there aren’t very good reasons for keeping them open). That is good news because it shows that there is more resilience in modern society than we thought. But it should make us reflect on whether we have our priorities right for the non-essential parts of our lives. Their action should be about providing wellbeing both to those using and supplying them. How well do they actually do this?

It also turned out that essential workers included a lot of people of rather lowly status in our society. Hospital cleaners; care home workers; supermarket shelf-stackers – all of whom tend to be paid as little as possible. The habit of calling these and other workers “low-skilled” has rightly been challenged. It is a stark reminder that a modern developed economy often rewards the ephemeral while taking the essential for granted.

We have found the magic money tree

The government has been called upon to open the floodgates of public finance, with a “what it takes” approach. The budget deficit has duly expanded into unthinkable territory. The sky hasn’t fallen in. Inflation and interest rates remain low. In fact there are no signs of financial stress at all, unless you count rather bubbly markets in financial assets. Doubtless that is partly because of the extraordinary economics of lockdown, when so much private spending and investment has been suppressed, leaving room to finance government spending. But we have much more flexibility on government finance than many thought we did, especially when we control our own currency.

If this looks too good to be true, it probably is. But we don’t really know what the vulnerabilities are. How do we know when we are overdoing it? For my liking economists are too focused on inflation. The consequence of overdoing things could as easily be some form of financial crisis that makes people poorer.

Hayek was right

We are supposed to be living in an information age, but governments, and everybody else, are blundering around for the lack of information. Governments can’t devise efficient schemes to help businesses in lockdown, even though they can afford them, because they have no good way of knowing which businesses need help, and how much. The result is that many are getting generous help they don’t actually need (including a lot of fraudsters), while many more that need help aren’t getting it. This information gap brings to mind the neoliberal ikon Friedrich Hayek’s argument in “the Road to Serfdom”. The most effective way of transmitting information in a complex society is the use of free markets. Government attempts to close the information gap result in oppression and corruption. The truth of that is evident in China, which has done most to gather and act on information about its citizens.

To them that hath shall be given

But the injustice of leaving matters to free markets is also very apparent. At first I was a bit sceptical by reports that poorer people were being hit hardest by the pandemic. People always say that, regardless of the facts. But it is very clear that people in poorer communities with less stable jobs have suffered more than anybody else. The big problem with free markets is that so many people lack the wherewithal to take part properly. This helps make the case for ideas like Universal Basic Income. The US scheme of giving handouts to everybody has been very helpful to the poorest, though it has also led to excessive gambling on financial markets by retail investors.

Free choice doesn’t work well in a pandemic

Libertarians have been very exercised by what they see as excessive government restrictions to individual choice. They feel the people should be left to make their own choices about the risks they want to run. Such critics have been made to look very foolish more than once. People may be able to make choices about personal risk, but they are ill equipped to assess the effect of their behaviour on others. The idea that the vulnerable should hide while leaving everybody else to take their chances doesn’t fit the complexity of society, where vulnerable people depend on others, or are forced to go out to earn a living. Instead of confronting these realities many libertarians instead tried to deny the facts, suggesting that covid-19 was similar to flu. This is another sign that unfettered free markets don’t provide efficient outcomes in many circumstances.

So where does the leave us?

What strikes me first and foremost from this is that we have become slaves to chasing marginal benefits while the planet is in crisis. As societies we could do a lot more to change the way we do things to address the dangers we face, without damaging health and wellbeing beyond some short-term disruption. “It will damage the economy,” is not an adequate reason for not acting. And the notion that economic growth is a prerequisite to positive change is false, in developed countries at least.

Government action is clearly part of the solution, but most successful action will come through individual initiative, with the action of free markets playing a central role, alongside a strong civic society that is able to challenge and complement government action. And it means that economists must move on from a focus to one focused on broader wellbeing.

Will we do this as life starts to return to normal? I wish I could be optimistic.