Today is 4th July, the U.S Independence day. On this day almost 250 years back in the year 1776, 13 states in the U.S declared their independence from British rule and took the first step towards forming the United States of America. In this very same year something special happened across the Atlantic which transformed the field of Economics for ever. Adam Smith, the great Scottish economist published his iconic work ” The Wealth of Nations” which became no less than the bible for generations of economists.
One of the central pillars of mainstream economics is Adam Smith’s proposition that, self-interested behavior by individuals lead them to creating social good, orchestrated by an “invisible hand”. The phrase “invisible hand” used to describe the unobservable market force that help the demand and supply of goods in a free market economy to reach equilibrium, guided the thinking of policy makers, market participants and intellectual thinkers for centuries.
But things are starting to change in the 21st century. The financial crisis of 2008, the persistence of the slowdown in the aftermath, the failure of conventional monetary and fiscal policies to revive economies, the cracks in global trade and the biggest of them COVID-19 Pandemic, have all given rise to doubts about conventional economics.
The COVID-19 pandemic has caused massive disruptions to economies, markets, supply chains, world trade and instilled a sense of fear among the people. This has forced a rethink on some of the ideas that economists have long taken for granted.
1. Rational Choice & Public Interest: Conventional economists conceive that the actions of individuals who help in transmission of an infectious disease, create an infection risk not just for those with whom an individual interacts through direct physical contact but also the society at large through chain contact. If the mortality rates from the current pandemic are analyzed an overwhelmingly greater number would be older citizens with comorbidities. The younger population has mostly been spared the health troubles although at the cost of sacrificing the benefits they receive from an uninterrupted life. This brings into focus the approach to make interpersonal comparisons of well-being to determine whether the benefits of a specific action to some outweigh the losses to others. It helps us to judge whether prospective additional losses of life of some may be viewed as outweighing the inconveniences and economic or social harms, possibly also serious, experienced by others for example the shutdown declared by India directly cause loss of livelihood for more than 120 Million migrant workers. India choose to jeopardize livelihood of millions to safeguard lives of thousands. Most conventional economists avoid such comparisons rather focusing on efficiency rank outcomes if all are made better off by a course of action.
On a more fundamental level, the pandemic also shows the lack of conventional economist’s understanding of individual rationality. Achieving the collectively rational outcome does not require departing from individual rationality, rather, it requires viewing individual rationality differently and more expansively than economists have typically preferred. Only with this comprehensive approach to rationality can one meaningfully comply with the requirements of the social good. Although abiding by such restrictions might be motivated by fear of punishment from authorities, it can also stem from one’s own reasoned choices with a societal effort at coordination. Either way, the current situation requires policymakers to go beyond the mainstream economic theory to justify, and to motivate compliance with, public health measures that diminish individual freedom.
2.Uncertainty and Policy Response: Uncertainty is typically understood as involving outcomes that cannot directly be assigned a probability. This makes it different from risks which are measurable. Economics offers limited resources to understand how to make decisions in the presence of fundamental uncertainty. The current Pandemic could have some similarity with the Spanish Flu of 1918 but one cannot be 100% sure of the same outcomes.
An article in The New York Times by Mark Lilla professor of humanities at the Columbia University titled “No one knows what’s going to happen” describes the elements of uncertainty very well. The article mentions the following:
- “The best prophet, Thomas Hobbes once wrote, is the best guesser. That would seem to be the last word on our capacity to predict the future: We can’t”.
- “But it is a truth humans have never been able to accept. People facing immediate danger want to hear an authoritative voice they can draw assurance from; they want to be told what will occur, how they should prepare, and that all will be well. We are not well designed, it seems, to live in uncertainty”.
- “The history of humanity is the history of impatience. Not only do we want knowledge of the future, we want it when we want it”.
This is absolutely true and people from India can easily relate to it. People spend a lot of money on astrologers in their curiosity to know about their future. Religion is often invoked to convince people to spend money on this activity.
The article states the following regarding the current Pandemic:
- “Apart from the actual biology of the coronavirus — which we are only beginning to understand — nothing is predestined. How many people fall ill with it depends on how they behave, how we test them, how we treat them and how lucky we are in developing a vaccine”.
- “The result of those decisions will then limit the choices about reopening that employers, local authorities, university deans and sports club owners are facing”.
- “At some level, people must be thinking that the more they learn about what is predetermined, the more control they will have. This is an illusion. Human beings want to feel that they are on a power walk into the future, when in fact we are always just tapping our canes on the pavement in the fog”.
- “A dose of humility would do us good in the present moment. It might also help reconcile us to the radical uncertainty in which we are always living”.
I can’t agree more on the above representation of the current Pandemic.
This is where the policy response in terms of monetary and fiscal policy are essential to provide a sense of stability to the private sector so that they remain calm and don’t go into overdrive mode in firing employees thus creating a panic in the larger economy. These measures don’t prevent Uncertainty but can certainly reduce the pain on the economy.
3.The larger Society:The conventional economists have always assumed an individual to be motivated by self interest rather than social relations. The notion that the economy can be analyzed independently of the public health, political, or social processes—often promoted by the dominant tradition in economics and reflected in general equilibrium theory is shown by the pandemic to be not merely fragile but false. A paper published by Mark Granovetter an American Sociologist highlights how economic actions are embedded in social structure and how conventional economists have “Under Socialized” the embeddedness.
The global response to the pandemic with nations isolating themselves from the rest of the world, motivated not by the desire to protect their economies but to protect the public health. The Implicit underlying in this overriding of economic priorities in favor of health emergency is the constitutional responsibility of Governments to protect their citizens. Many societies pay little heed to healthcare in normal times. But the pandemic underlines that the public health is a consequence of regulations, institutions, policies, norms, habits, and economic and social arrangements. As a result, state and societal action becomes paramount.The goal of flattening the curve has been embraced by all nations because there are insufficient hospital beds, ventilators, and other facilities to look after all of the potentially sick at one time. This capacity constraint is, however, the result of prior public and private decisions not to invest in what may then have seemed to some as excess capacity. The current severe curtailments of freedom in terms of mobility and physical assembly are the result of prior underinvestment. The changes in the structure of supply chains, once motivated by efficiency considerations, may also have made it more difficult to increase rapidly the output of required necessities, generating marked inefficiency as a result.During the current Pandemic which originated in China, there was huge disruptions to global supply chains which run through China.
Keynesian economic thinking has long underlined the societal interest in adequate investment, whether public or private. The pandemic brings to the fore that this interest can extend beyond how much investment there is to what investment there is. Current efforts to raise the supply of the constraining resources rapidly may require public coordination and redirection of private resources. A pandemic, like a war, makes the distinction between the private and the public spheres less meaningful.
A rational response to the pandemic requires recognizing that interdependencies between the various spheres of life are central to economic phenomena just as they are to the epidemiology. The kind of knowledge that is required demands active collaboration between social and natural sciences. The conceptualizing of the public interest, the understanding of relationship between individual and collective rationality, the recognizing of the role of fundamental uncertainty and the consequential need for judgment and justification in making public policies, understanding the economy in its social context, or in other ways, the discipline of economics must open itself to new insights and retrieve old ones. The required rethinking of concepts and methods is most likely to come with problem-solving. Difficult moments such as the present make a good beginning.