Home / Opinion / Columns /  What the pandemic has taught us about economics

A massive comet is hurtling towards our planet. A huge dust storm disrupts agriculture across the world. The first catastrophic possibility is from the new dark comedy, Don’t Look Up. The second is the starting point of Interstellar, the 2014 sci-fi film by Christopher Nolan. One economist described such events in a most interesting way. “A negative productivity shock hits the global economy, and various bad consequences ensue, including The Idea Trap. Behavioural factors exacerbate the course of events," wrote Tyler Cowen about Interstellar on the Marginal Revolution blog.

Economists will identify both cinematic events, in Don’t Look Up as well as Interstellar, as large exogenous shocks that change everything. Such exogenous shocks come from outside the system. The other type of shock that economists love to speak about are endogenous, or from within the system. Think of the 2008 North Atlantic financial crisis.

What about covid? The pandemic is also an exogenous shock to human society. We now know it has had profound consequences. The pandemic provides some economic lessons, as well as some lessons for economists. Here is a whistle-stop tour of some of the issues emanating from the covid shock that I think matter. Needless to say, this is not a comprehensive list.

Supply side redux: Mainstream economics has a neat division of labour. Growth over the long term is determined by the supply side, or the productive capacity in an economy. Fluctuations around that trend come from changes in demand. One fashionable school of macroeconomics even argues that economies always have inadequate demand compared to the supply that is potentially available. The recent disruptions show that broken supply chains can exacerbate both the economic cycle as well as inflation. Supply does not matter only in the long run. This is important as an even bigger supply shock challenges us—climate change.

Human action matters: It is now widely understood that the spread of the pandemic depends on how individuals respond to the situation. Are masks being worn? Is social distancing being practised? Are people getting jabbed? In other words, what matters is not only the interaction between aggregates such as the number of susceptible, infected and recovered citizens, but also the way individuals behave. Macroeconomists embraced such micro-foundations in the quest to overcome a crisis of the Keynesian consensus in the 1970s. Whether that was a good or bad turn for macroeconomics is a larger debate. What the covid experience shows is that you need to understand human behaviour—both rational and irrational—when complex systems are unsettled.

State capacity is important: This is especially so at the embattled front line. Public health, as against healthcare, has externalities which make it a public good under state control. Delivering on public health requires not just funding, but capacity. There is a widespread belief that the Indian state has ample capacity at the top, but get increasingly weaker down the line, till it is almost broken at the street level. The pandemic response shows that reality is far more nuanced. The frontline of the Indian state—from Asha workers and beat police personnel to municipal employees and local doctors—did a stellar job in the most difficult months of the pandemic. This is the first interface citizens have with the state. It needs to be strengthened.

Scenarios along with forecasting: Most people love a single number as an anchor to prepare for the future. That is why even traditional models with confidence intervals are often stripped down to a single forecast. Economic forecasts are often wildly off the mark, and epidemiological models too. The world is uncertain, in the sense that there is much that cannot be assigned objective probabilities. It is sometimes better to be data-driven, and then adjust to the emerging reality as raindrops of evidence fall to the ground. For the fuzzy possibilities of the decades ahead, it is better to build scenarios, from an approach partly inspired by the work of the English economist G.L.S. Shackle.

It’s an unequal world: John Stuart Mill wrote in his classic book on political economy that the laws of production are unalterable, like the laws of physics; but the laws of distribution can be guided by human institutions. Other economists would argue that the two are joined at the hip—how things are produced explains how they are distributed. The pandemic era shows that, in India at least, both the costs of lockdowns as well as benefits of the economic recovery have been unequally distributed. The usual assumption is that fiscal policy rather than monetary policy must deal with distribution issues, through taxes and spending. However, a new class of models are becoming mainstream. These HANK—or Heterogenous Agent New Keynesian—models reintegrate distributional issues into macroeconomics. More importantly, the underrated Polish economist Michal Kalecki could make a comeback, just as Hyman Minsky did in the aftermath of the 2008 meltdown.

I would usually have ended the year with a fun theme, for example what Sheldon Cooper from Big Bang Theory can tell us about the culture of giving in the holiday season ( Hopefully, the end of 2022 will see this column return to a less dreary theme.

Niranjan Rajadhyaksha is a member of the academic board of the Meghnad Desai Academy of Economics

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