New economic assumptions

The global financial crisis of 2008 caused a re-examination of many aspects of economic theory and policy, particularly with regard to financial innovation and regulation. This is as it should be; any discipline, in conception and practice, should be reviewed in the light of such a major shock. The ongoing economic and public health crisis caused by the spread of Covid-19 should also cause such a review. The lineaments of such a change in approach are already visible. For one, it is clear that concerns about the environmental impact of economic activity have hitherto remained marginal. But they need to move centre stage. Some aspects of the public health crisis reveal the errors of failing to put at the centre environmental and climate-change aspects. For example, natural resources are — like public health systems — public goods, without which broader economic activity cannot continue. A proper social discount rate also needs to be applied. Early action on coronavirus was essential even if costly, in order to prevent even greater costs later — and a similar approach needs to be taken on climate change. Denial of the future costs of climate change will have an effect on economies similar to the denial of the costs of coronavirus.

The dangers of inappropriate interaction with nature also need to be internalised in economic thinking. Coronavirus very likely emerged in Wuhan, as have many other similar viruses, because of the nature of human interaction with animals — in this case, wet markets featuring wildlife that might act as a store of virulent viruses. Industrialised farming also carries with it similar, if less intense, dangers. The meat, dairying and poultry industries have in the past created epidemics like the Mad Cow disease. (There are, of course, animal rights questions that are also involved in these discussions, though typically economists do not consider these factors.) The future of farming will need to be carefully considered, and a more integrated approach to its costs developed. Can organic or hydroponic farming produce efficiency and productivity similar to the current fertiliser-based approach without running down natural resource wealth as much?

Finally, the nature of global trade, built as it is around the most efficient networks, will have to be re-examined. The financial crisis forced finance to evaluate whether it was making the right trade-offs between returns and exposure to crisis. Greater capital adequacy requirements were eventually mandated, reducing the efficiency of capital but also lowering the chances of another crisis. Similarly, current global supply chains may be subject to over-dependence on certain geographies — or, at the very least, are not robust enough to survive the loss of some links in their chain. Although costly, this system would need to change, building in certain redundancies.

These are questions that have always been part of economic analysis, but have so far been relegated to the background. Given the scale and impact of this unprecedented crisis, these and similar issues can no longer be ignored. Both policymakers and academic economists will have to re-examine how they think about the costs of environmental assumptions, of interaction with the natural world, and of hyper-efficient supply chains. It is perhaps time to address potential risks that could be far bigger than those originating within the financial system.

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