Greetings reader from 2120, I see that you are trying to work out what the economic consequences of the unfolding pandemic in your time will be – and so are looking up information on the COVID-19 pandemic from 2020. I am a random person from 100 years earlier, and I am here to guide you on this journey.
Gulnara has done a great job of highlighting the broad way to view this pandemic and understand how such a shock works through the economy – but I think it is important that I give you some cautious advice about applying the 2020 lessons to your time.
Ultimately you can’t just take the economic consequences of a past pandemic (even if this virus itself looks similar) and state that this will be the consequence of it now – a lesson we have learned when looking at the Flu of 1918-20 in our time. However, I want to talk through some key issues to help you think about it.
A pandemic doesn’t change the capital stock – this matters
Relative to the 1918-20 and 2020 pandemics the stock of capital is an even more important determinant of output in 2120. And this matters for how we think about what activities would occur. Let me give an example of how home consumption of pizza can differ to explain.
A quarantine involves limiting social contact – especially social hubs – in order to slow down the spread of the virus. This video explains it well. So the necessity of shutting down activity will depend on how much human contact is involved in that activity and the related hub.
In 1918-20 there was no home delivery of pizza and a restaurant that sold pizza would be completely shut down during a quarantine. Customers would meet together there (a risk), the service would be from a person (another spreading risk), and the kitchen was filled with people (MORE RISK).
By 2020 things were different. There was home delivery, which removed the hub associated with consuming the pizza. Furthermore, there was an increasing possibility for delivery to be done by drone instead of person – which removed this risk. But we still need people in the kitchen constructing the pizza.
Putting several people in close proximity and then having them send food to hundreds of others leads to a hub that could spread the virus – if one chef has the virus then there is a risk it can be spread widely. As a result, we had to shut down pizza delivery and the restaurant just like in 1918-20.
In your time everything is done mechanically anyway – the pizza creation and delivery come with no risk for virus spread. As a result, all that needs to be shut down is the restaurant/human contact end of the process – the loss of value is directly associated with the loss of that particular service, rather than the substitute associated with having pizza at home. So the underlying amount of consumption activities that get restricted are much smaller!
Furthermore, in 2120 restaurants commonly provide virtual reality seating at home – this service is a high quality replacement for people heading out to meet up without the risk of virus spread. Given restaurants can do this so cheaply the actual loss of GDP is very limited.
Sidenote: I am amazed you still call it GDP given all of the bad press in our time – I understand why the measure is still useful, but just surprised you haven’t changed the name!
The embedded value of labour and post criris
A related point to this is to think about what is actually going on with the underlying value of labour.
Over the past 100 years a large number of technological advances have generated direct substitutes for labour at achieving tasks – without really creating tasks that are complementary to the capital input.
This has led to a situation that is a bit weird – why when you go to a coffee shop in 2120 is everything performed and serviced by automated forms of capital (eg robots), while the employees sit there in a supervisory role?
Now if this shock implies that you can generate the same product – that is valued in the same way by consumers – without labour inputs then this points to a situation where the labour input has zero marginal product. Why does a profit maximising firm even use labour then?
A risk I see coming out of this pandemic is that capital owners may recognise they don’t need labour in 2120 and have only been offering jobs due to history dependence. If this happens this will reduce the living standards of those who are not endowed with capital (or the ability to accumulate it). This process of business learning is related to bounded rationality – those who are making decisions within the firm have come under pressure, and may now make different decisions.
So please make sure that the state is doing appropriate redistribution to ensure there is some equality of opportunities here – we aren’t all born with access to capital, and if the return on labour is close to zero this is very problematic.
Separate supply and demand, short and long run
In the above example the key risk was associated with changing consumption patterns by households – the true “potential” for the economy to produce is unchanged.
This differs to our pandemic, where the necessity of stopping people working does temporarily reduce what can be created – it makes labour unavailable, and it also increase the shadow price of both other inputs that have become unavailable for the production process and products that are now available.
As a result, your pandemic is – as it should be – predominantly about public health. But, your economic shock is much more about demand as explained above and as a result should be much easier to deal with!
Although I imagine what constitutes aggregate demand is even more confusing in such a world, the idea that output does not need to be any lower in order to prevent the spread of the disease implies that all that matters is effective demand – and through monetary policy or by transferring funds through taxes and transfers it is possible to shift this.
Of course, if the composition of demand changes post-pandemic then there is a question about whether certain specific vintages of capital need to be written off. How flexible is capital in 2120? Does labour still have value due to greater flexibility in this time, or are the skills associated with human capital even more rigidly fixed – I have to admit to not being sufficiently familiar to the factors of production 100 years in the future.
So yes, there may be long-term costs – but you don’t have to worry about the short-term economic consequences we face if you don’t want to.
Keep your heads up and be kind
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But an idea that gives me peace is the realisation that the things we have all built together have not been broken by the virus – our relationships, our machines, our knowledge, and our humanity.
Once the medical issue has been dealt with we will return to sing the same songs, produce the same products, and share the same experiences as we did in the past – we just need to work together to spread the pain of what has happened now between us, instead of throwing it all on the shoulders of a few unlucky individuals and families.
Our love and our kindness is what pulls us through this pandemic, and similar empathy – along with a recognition that we don’t have to put people through economic pain due to “reallocation” or “liquidationist” views of the world – will make sure that you all come through the other side of the pandemic stronger than you went in.