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Foreign Policy
Why standard economic theories have no answers for this kind of crisis.
BY SANJAY G. REDDY | MARCH 31, 2020, 2:52 PM
The coronavirus pandemic has dramatically disrupted the everyday social
and economic patterns of societies around the world. Economists have
focused on its economic impact and on what central banks and governments
should do in response to an unusual simultaneous disruption of both
supply and demand. There is consensus that governments will have to
support businesses and workers who are losing income—or risk dangerous
knock-on effects on banks and the real economy—and find a way to finance
these expenditures. There is also an urgent need to ramp up the
production of essential commodities such as ventilators, gloves, and
masks; to provide hospital beds; and to ensure that required personnel
can themselves turn up for work. Despite disruption to supply chains and
restrictions on the population, essential goods and basic services must
be provided, firms must be kept from going bankrupt, and employment and
incomes must be maintained.
These circumstances raise fundamental questions about the role of the
market and the public sector in doing what is needed on the required
scale and with sufficient speed. Some economic thinkers are rightly
attacking these problems with urgency.
But addressing such practical ends also calls for us to rethink more
basic economic ideas. The economics discipline has provided the most
influential framework for thinking about public policies, but it has
proved inadequate, both in preparing for the current emergency and for
dealing with it. The pandemic underlines the necessity for a rethinking
of our received ideas about economics and points in some directions that
this rethinking should take.
The public interest and rational choice
Let’s first take the view of mainstream economics of the relationship
between individual and collective rationality in a situation like the
current pandemic. It conceives that what seems rational for the
individual to do can end up being irrational from a collective
standpoint. Conventional economists conceive that the actions of
individuals who propagate an infectious disease generate an externality
in the form of an infection risk (not just for those whom an individual
interacts with directly but those whom they interact with, in turn),
thereby raising the disease risks in society at large. It may be
reasonable for an individual to judge that an interaction with a
specific other individual is low risk for both of them, but many such
interactions multiplied across a population would greatly increase the
speed of transmission of the disease and the ultimate risk of infection,
not merely for the person concerned but for others
There is not much to quarrel with here. The trouble comes later.
Externalities can be such that some are harmed by them or that everyone
is harmed by them. The current pandemic involves aspects of both of
these cases, but in either instance, a rethinking is needed.
Since mortality rates from the current pandemic are overwhelmingly
greater for the old, and younger people most often experience small
direct harms compared with 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 all can be made
better off and instead undertake interpersonal comparisons of well-being
to determine whether the benefits of a specific action to some outweigh
the losses to others. Most conventional economists studiously avoid such
comparisons, focusing instead on efficiency considerations that rank
outcomes only according to whether all are made better off by a course
of action. In this situation, such an approach will get us nowhere. The
economist Lionel Robbins famously attacked interpersonal comparisons as
being questions of “Thy blood or mine.” But in this case they may be
questions of “Thy blood or my livelihood.” Interpersonal comparisons
permit 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.
A pandemic allows us to see why it is absolutely necessary, even if far
from straightforward, to weigh different people’s interests. Such
comparisons can of course be fraught. In the best case, meaningful
public deliberation on them can provide some social and political
legitimacy. Drastic decisions by governments in Europe and the United
States to stem the pandemic so far appear to have earned public support,
even in the absence of much public discussion. But ultimately, societal
deliberation is unavoidable about the weights to be attached to
different interests, not only to gain adherence to them but to ensure
that justifiable trade-offs are being made.
If there is a case for having restrictions on day-to-day life in place
for a sustained period, it must be based on a willingness to weigh the
interests of different people against each other. Similarly, the case
for requisitioning private resources (such as medical facilities,
buildings, or intellectual property concerning the makeup of
pharmaceuticals or the design of ventilators) in order to serve the
immediate public purpose of fighting the pandemic can be best understood
in terms of exceptional but reasonable trade-offs between the vital
interests of some and the less vital interests of others. The
willingness and ability to undertake such trade-offs is inherent to the
concept of the public interest.
On a more fundamental level, the pandemic also shows the inadequacy of
the conventional economist’s understanding of individual rationality. In
some measure, the control of a pandemic aims to avoid results that are
damaging to all, at least among those who are similarly positioned in
terms of risks from the disease. Achieving the collectively rational
outcome does not require departing from individual rationality, as the
standard framework would suggest (as, for instance, in the famous
example of the prisoner’s dilemma). Rather, it requires viewing
individual rationality differently and more expansively than economists
have typically preferred. This is not a new idea. Critics of the narrow
understanding of rationality in economics have long underscored the need
to understand strategic interdependencies from a broader perspective,
for instance that of enlightened self-interest—a concept that was
advanced by Adam Smith and recognized by Alexis de Tocqueville but has
largely fallen into disuse. Similarly, moral philosophers, in particular
Immanuel Kant, underlined that a reasoned approach to morality required
evaluating one’s own actions by how they would be judged if undertaken
by others. All of these thinkers believed that rationality, properly
understood, must include reasons that lead away from the relentless and
myopic pursuit of individual advantage.
Only with this more comprehensive approach to rationality can one
meaningfully make an appeal for voluntary compliance with the
requirements of the social good. It is noteworthy that in the model most
prominently used by policymakers to inform their response to the present
crisis, only partial compliance with social restrictions has been
assumed. Although abiding by such restrictions might be motivated by
fear of punishment or by respect for authority, it can also stem from a
willing alignment of one’s own reasoned choices with a societal effort
at coordination. Either way, the current situation requires policymakers
to go beyond the narrow toolbox of mainstream economic theory to
justify, and to motivate compliance with, public health measures that
diminish individual freedom.
Uncertainty, judgment, and justification
A second reason that conventional economic thinking offers very limited
guidance in the present circumstance is the presence of fundamental
uncertainty. Economists have long made the distinction between
uncertainty and risk. Uncertainty is typically understood as involving
outcomes that cannot straightforwardly be assigned a probability, unlike
risk. Economics offers limited resources to understand how to make
decisions in the presence of fundamental uncertainty. But a still deeper
form of uncertainty is one in which the possible outcomes cannot easily
be anticipated at all. Such a wildly unpredictable outcome has come to
be popularly known in recent years as a black swan event.
The coronavirus pandemic might at first appear to have been such a black
swan event, but that claim does not withstand scrutiny: The possibility
of such a threat was long recognized by experts. This recognition led to
scenarios being discussed at the highest levels of governments. The
possibility of a pandemic was therefore a “known unknown” rather than an
“unknown unknown.”
The prospect of a pandemic involving a coronavirus thus involved
fundamental uncertainty of the first type: an occurrence that could be
anticipated—indeed, was anticipated—even though it could not be assigned
a probability, nor could it be known whether, when, and in what form it
would happen. Given this, it now seems obvious that the relevant public
health infrastructure had been severely neglected. For instance, at the
global level, the World Health Organization (WHO), which plays a central
role in the surveillance of and response to emerging diseases, may have
been inadequately financed. It is a different matter that WHO has also
been accused by some of a poor initial response to the pandemic. A
similar claim could be made about the national public health
infrastructure in many countries.
The fundamentally uncertain nature of the evolution of the pandemic
gives rise to continuing deep dilemmas as to the so-called rational
response to the current coronavirus emergency. Consider the metaphor of
“flattening the curve,” which has informed governmental and societal
responses to the pandemic. The potential results of measures such as the
closure of schools and universities, restaurants and bars, and social
distancing have been underpinned by simulations that are, inevitably,
based on specific assumptions and limited evidence and that focus mainly
on one goal (avoiding deaths from the disease). The motivation for
undertaking specific measures is based on the expected direction of
their impact, but what actual effect they will have, in relation to the
spread of the virus, let alone other health and non-health consequences,
is unknowable from the models that have been used. This is implicitly
admitted by the model builders, who have therefore studied the impact of
periodically turning restrictions on and off as information about the
success or failure of policies comes in.
The inadequacy of existing models leads to reasonable disagreement on
the right course of action. The effects of the draconian closure of
borders, and the shutting down of many aspects of day-to-day life, on
other aspects of physical health, mental health and loneliness,
sociability, economic prosperity and inclusion, public finances,
education, and birth and death rates, among many other factors, add to
the uncertainty confronting societies. Each of these relates to the
others in complex ways. The effects of such draconian policies are
difficult to know. Some effects of policies may be persistent or
permanent. Others may be temporary but highly disruptive. The plausible
chains of causation are diverse. An effort to chart them is essential to
making prudent public decisions but also necessarily encounters serious
limitations.
The late sociologist Ulrich Beck, who spoke of the emergence of a “risk
society” that generated “bads” as well as “goods,” distributed according
to often unknown or unknowable chains of causation, was not far off the
mark. The need to undertake adequate measures to stanch the disease must
be balanced against our knowledge that we do not, and cannot, know all
that 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 underlines their limits. In a democratic context,
public decisions must be underpinned by judgments that are capable, in
the light of day, of being supported by reason and sustained by societal
deliberation. Judgment must therefore be combined with justification.
The fundamentally uncertain nature of the impact of the pandemic and its
evolution will influence private sector responses, and this must in turn
be taken account of by public policies. The famous Ellsberg paradox
showed that individuals have an aversion to uncertainty that goes beyond
their aversion to risk. In a situation where both the “state space”
describing possible events and the probability to be attached to each
such event are unknown, the emotional element in decision-making is
prominent; the “animal spirits” of investors come to the fore. For
instance, although there are rational reasons for the collapse of market
sentiment as a result of the pandemic, the enormous day-to-day
fluctuations in stock prices in its aftermath 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 assurance to private actors. This can create expectations of
stability so that private actors continue where possible to spend and
invest, plan for the end of the public health emergency, and avoid
actions that could create adverse knock-on effects on public health or
economic outcomes, such as firing workers. Panic is itself a risk factor
and can be triggered by the wrong public actions or calmed by the right
ones. Governments can provide a backstop that ensures the survival of
firms and the continuity of employment and incomes so as to maintain
aggregate demand and broad-based solvency and liquidity. This may
require outright subsidies and transfers in order to enable economic
activity to go on and to avoid irreversible damage. But these are ways
of dealing with uncertainty, not dispelling it. Identifying the
necessary interventions that take note of the interdependence between
public health, economic stability, and other factors is in the nature of
a “wicked problem” and demands extraordinary public leadership, at a
time when trust in government is unprecedentedly low. There is,
moreover, no formula for it. Although economics can provide required
input, no one discipline, nor indeed all of them together, suffices to
turn art into science.
What is an economy?
Third, consider that an economy cannot be separated from society: It is
socially embedded. 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.
One way to see this is that the appropriate economic policy response to
the pandemic depends on what is held to be of value—and the values to be
considered go beyond the narrowly economic. Former White House chief
strategist Steve Bannon reportedly said that “a country is more than an
economy.” He was right, if for the wrong reasons. The global response to
the pandemic would have seemed impossible even yesterday: nations
isolating themselves, motivated not by the desire to protect their
economies but to protect the public health. Implicit in this overriding
of economic priorities is the importance of an idea of common
citizenship and shared fate. Many societies pay little heed to this idea
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, or lack thereof, becomes paramount. 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
transmission belt for disease. An influential idea of economic policy
was that each objective requires its own instrument, but when causal
interlinkages are deep, the instruments—in this case, public health and
economic policies—must be coordinated to achieve the objectives.
The pandemic also blurs the dividing line between the private and the
public. The goal of flattening the curve has been embraced 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—but not to all—to be
excess capacity. The current severe curtailments of private freedoms, in
particular of movement and assembly, and disruptions of patterns of
life—with potentially damaging economic, social, and health
consequences—are the result of what appear in retrospect to have been
prior underinvestments. 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. 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.
It brings into high relief previously obscured interdependence. This is
not mere theory but thinking that makes sense of practice, especially
but not only in extraordinary times.
A rational response to the pandemic requires recognizing that
interdependencies between the spheres of life are central to economic
phenomena just as they are to epidemiology. The kind of knowledge that
is required demands active collaboration between the various social and
natural sciences. Whether it is in conceptualizing the public interest,
making sense of the relation between what is rational when viewed
individually and when viewed collectively, recognizing the role of
fundamental uncertainty and the consequent 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 about due to
the demands, and in the crucible, of applied problem-solving. Difficult
moments such as the present one make a beginning.
Sanjay G. Reddy is an associate professor of economics at the New School
for Social Research in New York. Twitter: @sanjaygreddy
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