Reclaiming Economics after Covid-19 Carolina Alves and Ingrid Harvold Kvangraven

The Covid-19 pandemic is a crisis like no other. Unlike the 2007-08 financial crisis, there are no banks or financial markets to blame. Nor can we blame Keynesianism as we did in the 1970s. By contrast, the pandemic forces us to evaluate the structural problems inherent in the global system of provisioning. People from across the political spectrum can see both our society’s unpreparedness and its inadequate response to the outbreak. We argue here that our inability to deal with the current crisis exposes weaknesses in the very foundations of the dominant economic paradigm. In order to enrich our understanding of how economies work, so that we can build a more resilient and just economy, this paradigm needs to change.

From Political Economy to an Exact Science obsessed with Markets

The theoretical developments in economics since the period of classical political economy that led to lack of preparedness is the separation of economy from its broader societal aspects related to, for example, nature, ethics, and power. The field gradually removed the social and historical contexts from economic analysis, starting to view social behaviour through the lens of homo economicus, and macroeconomic outcomes through the technical lens of equilibrium solutions of mathematical models. These developments, striving to be a political and ahistorical, were built on European positivist assumptions of a universal objective truth.

In this process, economists became increasingly more comfortable in understanding human interactions mainly through the market. They gradually started thinking of themselves mainly as modellers, ‘simplifying’ reality through models and invoking the necessary assumptions regarding market equilibrium, representative agents and optimisation – a technisation of the discipline that was also accompanied by an increasing use of econometrics.

The final picture is a discipline marked by the influential role of a general equilibrium framework, which assumes conditions such as perfect market competition, and sees the state as an institution supporting the market. Here, deviations from the basic assumptions that underpin market equilibrium are considered “imperfections” or “externalities,” thus retaining a form of market fundamentalism at its core.

With this backdrop, the discipline is struggling to grapple with the cross-cutting nature of the current crisis. If anything, economists can only understand and theorise Covid-19 as an external shock, reflecting their view of the economy as separate from the rest of society and of externalities preventing effective functioning of markets. Naturally, policy recommendations emanating from this theoretical framework largely revolve around solving market failures and nudging individuals to behave rationally. Now that the economy is partially shut down and “normal” market mechanisms are put on hold, it is perhaps not surprising that the discipline may struggle to propose effective policy solutions.

Public Policy Implications: A Weakening of Public Provisioning

The implications of these concerning developments in the discipline are not limited to shaping our understanding of economics – they have also heavily impacted policy. The discipline’s bias towards the market as an efficient allocator of resources has led to a weakening of the structures of economies and their capacities to engage in social provisioning across the world, both because of the vilification of “the state” alongside a celebration of market efficiency and because of the promotion of austerity that has driven government deficit reductions, spending cuts, and attempts to dismantle social welfare systems across the world.

As efficiency became a core public goal, this implied the elimination of any idle resources to ensure all capital is put to efficient use. The focus on efficiency has not only led to poor monetary remuneration to essential workers such as nurses but also to “just in time” and “lean work” procedures that justify decades of systematic underinvestment in planning and surge capacity. We see this, for example, in the reduction in the total number of hospital beds, as in the case of National Health Service hospital beds in England dropping by more than half during 1987 to 2017.

The idea of the state as this potential Leviathan that needs to be restrained together with an “efficient” approach to the organisation of society has engendered worrisome fragilities, inequalities, and vulnerabilities, leaving us completely unprepared and incapable of responding effectively to the pandemic. If we thought of structuring our society along the lines of resilience and robustness rather than efficiency, our societies’ preparedness for a pandemic would be much greater.

Public Policy Implications: Economists as “Experts”

On the technical side, economics has experienced an empirical turn through random experiments and quasi-experiments, which has been used to justify an increase in economics’ policy relevance and scientific impact. With the rise of so-called RCTs, we have also seen a rise in so-called evidence-based policy – a discussion of utmost importance to understand the role of evidence in the current policy response to the pandemic, particularly in light of the UK’s response.

The issue is one of taking decisions based on behavioural experiments in entirely different contexts and using evidence and modelling expertise more broadly as an almost unquestionable guide for policy, despite the fact that any model will only represent a particular perspective. In the former case, we see the UK relying on randomised experiments on extending military deployment when considering that locking down early may cause negative psychological effects and a risk of demoralising people in case of an extended lockdown. In latter, we have the Imperial College London (ICL) model providing evidence as early as the end of January to support general social distancing while focusing on Covid-19 mortality and not appraising other health and non-health implications of the pandemic. Thus, not dealing with broader economic and social costs of various interventions.

The UK response demonstrates both the over-influence of a particular expertise on policy and its disproportionate influence of models. Having a limited team of experts means that important perspectives will inevitably be neglected. Given that “coronavirus advice is political,” forming a more diverse scientific advisory group would be a first step to broadening the evidence available to the government and making the tensions and value judgments inherent in any response explicit. Indeed, this would lead to increased public scrutiny and understanding, which would be healthy for democratic debate.

Heterodox Economics: For Better and Broader Analyses

If the Economics profession is to remain relevant, it needs to return to its roots and bring political economy “back in”. Rather than being centred on the study of the allocation of scarce resources, heterodox economics is concerned with the study of production and distribution of economic surplus, including the role of power relations in determining economic relationships, the study of economic systems beyond market relations, and the employment of theories focusing on these issues. This alternative view of and approach to the economy can help us understand the causes and consequences of the Covid-19 pandemic in crucial ways.

First of all, given that heterodox economics moves away from the rational optimising agents and the methodological individualism of the mainstream, it allows us to understand the structural inequalities the pandemic has exposed and exacerbated. Essential here are insights from feminist economists, who have long pointed to the importance of understanding both social reproduction and social relations between actors. As the spread of the virus between individuals has led to measures such as school closures, society has been forced to grapple with the importance of social reproduction as a core activity that keeps the economy going. Beyond gender inequalities, the pandemic has also exposed inequalities along lines of class and race.

Secondly, heterodox economics, with its focus on structures of production and reproduction in society, leads to a better understanding of economies considering their historical determinations and causal mechanisms not limited to the sphere of the market. An implication of this view is that we cannot expect the same behavioural responses or societal outcomes across different social communities, given differences in history, culture, and economic organisation. Instead, the perspective forces us to consider how responses to the pandemic are mediated by institutional, social, and economic factors.

Situating the economy in society enables exploration of the intricacies between the economy and nature, for example, by food systems researchers or ecological economists. Indeed, to scholars with a broader understanding of how production impacts food and ecological systems, the rise and spread of Covid-19 was less of a surprise. Such a perspective starkly contrasts to viewing the pandemic as an exogenous shock, showing the extent to which the capitalist production is intertwined with nature and cannot be seen as separate – an important lesson for many heterodox economists as well.

Third, heterodox economists put distributional conflicts at the centre of economy analysis, which helps to explain the low wages among essential workers are determined by policy, rather than being a reflection of a market-determined price. As the pandemic has forced policymakers to consider public health as a broader societal issue as well as including shelters for the homeless, paid sick leave, and universal health coverage, we need a framework that allows us to see the enduring structural aspects of these socio-economic problems. The distributional conflicts can also be seen at polarising tendencies within the global economy and the new vulnerabilities arising from global economic integration, which show both how global value chains are hierarchical and imbalanced with core hubs and constraints on the developing economies due their subordinate or dependent position in the global economy.

Finally, we need to go beyond a simple state–market dichotomy (and the simplistic view that wherein heterodox economists want ‘more’ of the state and the mainstream wants ‘less’). The role of the state in the economy is much broader than in just rectifying market failure, we should have a broader understanding of economies as non-market environments. Within this view, there is a public economy composed of multiple economic systems, wherein the public sector is not governed by the same principles and axioms as that of the market. This view leads us to consider the advantages of a collective-choice and collective-financing system that produces goods, services, benefits, and protection aimed at the well-being of society as a whole.

Building a More Resilient and Just Society

The nature of the discipline makes it difficult for economists to understand the economy in a comprehensive and realistic manner. Economists’ view of Covid-19 as an external shock poses problems for the discipline’s ability to grapple with the interconnected crises that this pandemic represents. At this juncture, it is more important than ever to open up the debate about how to understand and tackle these crises, with a view to make our economies more resilient and just, rather than simply more ‘efficient’. It is time to revisit the field’s flawed conception of the economy as a market equilibrium economy and obsession with narrow forms of evidence and modelling.

We economists need to be more explicit about the political and ideological aspect of our academic work as well. Analyses are more concerned with social conflicts and different group interests in the economy could pave the way for a broader and more informed public debate about economics. For such a debate to be effective there is also a need to revise the role of so-called evidence-based policy in economics and public policy. This pandemic exposes the fact that data and evidence are never entirely neutral.

In the coming months and years, there will be a battle to define the narrative of the pandemic. We need an explanation of the crisis that is capable of seeing the economy as more than just markets and, rather, as embedded in society. It should be capable of linking the causes and consequences of the pandemic to our systems of production and distribution. A fundamental change in the prevailing economic narrative is necessary for a more just, robust, and democratic society.

(Carolina Alves is Joan Robinson Research Fellow in Heterodox Economics, University of Cambridge.)