The law of supply and demand is one of the first thing you learn in economics. Mastering this basic concept is probably 80% of the economics you need to understand the modern world. The second concept that is required is that of capital and labour, the two groups that form the basis of a capitalistic model of an economy. A recent paper by Òscar Jordà, Sanjay Singh and Alan Taylor [link] looks at the historical effect pandemics (and major wars) have had on economic activity, in the decades following. The paper is well worth reading and makes some interesting observations.
The headline finding is that the effect of pandemics, on investment returns can be felt for around 40 years after the event. The paper also finds evidence of wage rises in the aftermath, this assumes the logic of labour scarcity due to the greater loss of life caused by a pandemic (supply and demand). Also studied by the researchers were the effects of major wars, they found that these did not have the same effect on investment returns, presumed to be due to destruction of capital (think bombed factories) that require rebuilding when the conflict is over. The logic in the paper is sound, however, by their own admission Pandemics are rare events and the data is far from extensive. A few observations I made after reading the paper:
1. This is arguably the first true global pandemic the world has faced with modern global healthcare infrastructure. Researchers were working with digital sequences of the virus (released by the Chines government) before any confirmed cases in western countries [1]. This more coordinated response should hopefully lessen the death toll, hence lessen the labour shortage post-pandemic.
2. Though no physical destruction of capital will occur. Post pandemic there are going to be questions raised regarding the medical preparedness of countries, particularly western countries who’s hospital systems and medical supply chains were found lacking in certain areas. Healthcare spending in the USA is already 17% of GDP [2] it would not be a surprise if this were to increase post-pandemic due to public pressure. Also opening a factory producing N95 masks somewhere close to London is looking increasingly to be a viable business opportunity.
3. The only mention of potential behavioural impacts is that of the individuals’ propensity to save. The social impacts of this pandemic are yet to be seen, this is the first time in modern history there have been nations on lockdown. People are having to find new ways to live, work and socialise. There is also an argument to be that this is a time of great reckoning, especially when you consider it is coming alongside drastic changes in the political order in many western countries [3].
4. Finally is that there is an argument we have been living for too long with the balance between capital and labour drastically tilted [4]. The strength of capital and its abundance has allowed for the creation of unsustainable business models. The economics of an Uber ride consists of you the user effectively receiving a travel subsidy from Saudi Arabia, who are willing to do so, due to fact a small group of programmers, in California, have worked out a system that effectively lets them subvert minimum wage and local tax laws. Billionaires supporting millionaires. The economics underpinning much of the modern gig economy does not make sense. Yet this pandemic has exposed how much we rely on such services. Post-crisis if there is a rebalancing, meaning workers in these industries receive a more appropriate wage this may drain the excess of capital which is arguably surpassing normal returns and distorting markets.
1. David Heymann & Nahoko Shindo, COVID-19: what is next for public health?, The Lancet (2020)
2. Ryan Nunn, Jana Parsons & Jay Shambaugh, Economics of the US Healthcare System, The Hamilton Project (2020)
3. Dan Roberts, Trump, Brexit and demand for change: the year of the political outsider, The Guardian (2016)
4. Wolfgang Streeck, Buying Time: the delayed crisis of democratic capitalism (2017)
Bounded Rationality 