Bias of optimism and the pandemic economy
Something like this optimistic bias is strongly encoded in the way we tend to think about the economy. This is not just a modeling problem: the belief that the wider environment is stable and therefore can be ignored is the basis of conventional “neoclassical” economics as such.
It is well known that if the environment does appear, it tends to appear as an “externality” – as something separate from the economy and the model of economy we use, but which then intrudes.
So imagine, for example, that a pencil factory pollutes the air, and this air pollution causes more respiratory illnesses, increasing health care costs elsewhere. The environment appears here after the fact of economic activity. It is strictly external to this activity.
This is, as generations of environmental economists have pointed out, a kind of nonsense.
It is clear that we inhabit the physical environment before we start to build factories and poison the air: unfortunately we are not ethereal creatures of pure thought and beauty, but we have to survive by rubbing ourselves against a filthy material reality, and this is fundamental to all that we do.
But by excluding the environment from our conception of economics – unless we are forced to reintegrate it, once, say, childhood asthma cases become so frequent that they are inevitable – we implicitly assume that it does. has no importance.
I don’t mean as a moral point. I hear it as an economic modeling point: by excluding the environment, you must also assume that the environment is not relevant to any future conclusions of the model – that the environment is a passive support for all economic activity. that you want to think about.
This is also a problem that persists throughout the discipline, in a weaker form. Schools of thought outside of neoclassicism, like post-Keynesianism or Marxism, also tend to simply take a stable environment – and therefore the prospect of unlimited future growth – as read. This is an unexamined assumption of the model.
But this can be good if the environment, as a general rule, is globally stable: that the environment can be thought of as a kind of passive sink that we can, if we wish, decide to include in our modeling and our designs. economy, but that we do not have To.
You do not have include so-called externalities: by their nature, they are assumed to be external. It’s a question of choice. If we consider economic growth, we can make the strong assumption that there is a trend rate of growth, and whatever shocks do occur – these “externalities” again! – their effects will wear off over time.
What if that no longer applies? There is no real reason to believe that covid-19 is the last such pandemic that we will encounter, for example.
The most likely culprits of new epidemics are the influenza viruses that circulate among our livestock: rapidly changing, in close proximity to potential human hosts, influenza is the stuff of pandemic planning.
But even here, given the characteristics of influenza compared to SARS-Cov-2 – the absence, perhaps most importantly, of the asymptomatic but infectious period of covid-19 that caused (and will cause) such chaos – just might make it a bit more manageable, or at least make containment something more akin to a wildfire than this slow-burning chronic social disease we have now.
That said, given that SARS-Cov-2 is so well suited to the type of society we live in, it at least seems plausible that if another zoonotic breakthrough did occur and spread, it would have similar characteristics: that if we find ourselves on the wrong side of a future pandemic, it too have similar characteristics to SARS-Cov-2 because we live in a society for which SARS-Cov-2 is well suited. To the extent that we’ve adapted ourselves to covid-19, that’s less likely, of course.
So we probably won’t have an environmental calamity with the same destructive characteristics of covid-19 in the future; or, at least, if we did, we would need to be deeply unlucky.
To put it in rough terms of conventional economics: it does not seem likely that a single reduction in global productivity will occur due to a future environmental catastrophe, although it cannot be entirely ruled out.
But we can be almost certain that the succession of extreme weather events and natural disasters will accelerate, as they have done for the past fifty years.
The cumulative effect of continual and growing environmental crises is to dramatically increase the costs and difficulties of economic actions: we will struggle to simply produce goods, as we are currently seeing with (say) semiconductors; we will have more difficulty providing services, as we see with covid-19; we will find ourselves devoting more and more of our collective wealth to meeting the costs of recurring environmental emergencies.
If one takes the environmental forecast seriously, there is no indication that economic growth will return to trend. Greater volatility in growth in general – more peaks and troughs as the economy is beset by environmental disasters – and lower growth on average is certainly a more plausible prediction.
It would be a break in the functioning of capitalism, equivalent to its initial push towards “inorganic” energy sources like coal in the late 18th and early 19th centuries.
As Andreas Malm is very brilliant Fossil capital argues that it was the pursuit of stability versus an environmental dependency that saw early industrial capitalism shift from cheaper but erratic hydropower to more expensive but consistent coal and, later, oil.
This insight – that capitalism will substitute increased control for lower costs – is of exceptional importance, and I will come back to this later. For now, note that Michal Kalecki makes the same underlying point in his classic 1943 essay on full employment.
A capitalism shaken by successive environmental catastrophes begins to resemble somewhat its primitive pre-industrial form: incapable of producing regularly and systematically, but suddenly subjected to forces which have always remained out of its control.
The problem of work – which, annoyingly, remains the problem of managing people who, annoyingly, may have their own ideas about management – would be joined by, and indeed, more and more is to which is added the problem of environmental management.
Not a question of extraction and use of resources, around which industrial capitalism is built; not even the problem of dealing with specific, localized environmental problems – installing air conditioning, say, where typical temperatures are otherwise too hot for office work – but something that appears at the macroeconomic level as widespread instability.
Add, as it should be, the capacity of the financial system to strengthen and redistribute this instability – by taking, through the power of credit, failures in one part of the world and turning them into financial crises everywhere – and the prospects for growth future economic decline further. Regulators are increasingly alert to the prospect of environmental instability leading to financial turmoil.
Add, more speculatively, the extraordinary resources devoted to technologies that are simply not very effective in increasing overall growth – those huge investments in information technology that one day in the near future will surely produce a radical change in business. productivity measured, just not today – and it’s hard to maintain the sunny optimism that a 2% trend growth rate implies.
But if the economy will no longer grow as before, the question of redistribution arises.
It is no longer enough to assume openly as in “runoff” or implicitly – as in most versions of social democracy – to assume that growth will be beneficial for most people, for if it comes up against severe constraints , it won’t – not in the medium term – in the longer term, at least.
Expect more wrangling over the redistribution to come; the current arguments around inflation are only a precursor.
Jo Michell has an excellent and brief overview of why wage increases are to be welcomed, but interest rate hikes are against it, to cope with the current and ongoing inflation surge.
If this alarming Financial Time interview is anything, the new Bank of England chief economist Huw Pill might read. Otherwise stagflation, pandemic and environmental collapse will be a fun combination in the next few years, I’m sure.
Richard Seymour has been pursuing the same thinking about our likely future for some time. You can read his latest article on the supply crisis on his Patreon here.
Meanwhile, in scenes that I think / hope will repeat in this country, the United States is in the early stages of a wave of strikes. In the developed world, the combination of foreclosure dislocation, some lingering pandemic restrictions, but increased consumer demand is leading to tightening labor markets.
For the first time in two or more generations, the balance of bargaining power is shifting in favor of labor and against capital. This turns into wage increases, and – unlike a decades-long model under neoliberalism – in the US and UK it is the lower paid workers who seem to benefit the most. Sharon Graham’s first address to Unite’s Policy Conference as general secretary of the union is a crucial strategic statement here.
James Meadway is an economist and former political adviser. Subscribe to its new newsletter.