Economic historians know well that pandemics and existential crises can change the evolutionary trajectory of economic systems. The most illustrious case was the Black Death that ushered the demise of feudalism via its impact on labour supply and wages. In the 20th century, the Great Depression and WWII fundamentally changed the role of government in the economy, even in terms of basic institutions such as GDP statistics which was a child of the war economy. Hence, it is reasonable to ponder what the Corona virus will mean for the economy in the long run. Most people still focus on the immediate effects on growth. Yet, a few astute observers already notice that the crisis deeply affects the institutional structure of the global economy, from the role of government to business models. I want to push this one step further and ask: Will the crisis revolutionize capitalism, similar to the impact of Black Death on feudalism?
Steve Schwarzman, the founder of Blackstone, is cited in saying that the Corvid-19 is an opportunity for investors. Indeed, even many big companies face steep declines in their business outlook (think of Boeing) and see their share prices tumbling. This implies that there is a great risk that capitalism will even strengthen, in the sense of market concentration, as the biggest and most powerful companies will weather the storm and devour weaker competitors (will Apple acquire Disney, with cinemas closed for months, and holiday parks without visitors?).
Yet, I believe that that capitalism will be shaken at its pillars. The first observation is already obvious: Governments reinstate their dominant role in the economy. Look at Britain: Labour has drifted leftwards anyway, but now the Tories respond to the crisis with a whole battery of strong interventions, even considering the nationalization of companies. Gone are the days of Maggie’s market fundamentalism. Worldwide, governments are obliged to take a leading role in protecting the economy. One sacred principle after another is given up, such as in Germany the ‘black zero’. Since we can expect that the economic effects of the crisis will be long lasting, history teaches us that such emergency measures will have lasting impact on institutions, too, if only because people learn that the emperor has no clothes.
Therefore, I expect that the Keynesian government of the post-war years will see a vigorous come-back. But that may be just seen as another mutation of capitalism, what John Rawls has christened ‘welfare capitalism’. I believe that the distributional impact of the health crisis has more potential as a game changer. In our neighbourhood, people begin to feel deep unfairness in the way how the crisis affects different groups in society. Many of those affected most, worldwide, have played a crucial role in the waves of new business models that drove capitalist growth in the recent decades: The gig-economy in advanced economies, the part-time workers in the female workforce, the migrants in China, and so on. Especially in the United States, but in less advanced emerging economies anyway, all these groups are weakly protected by social safety nets. President Trump and the Republicans loathe Obamacare: But now it is apparentto Americans what it means if the health care system is not universal, if regulations on sick leave are weak, or the basic level of health care facilities is lopsided in favour of the better-off in society.
Via the spread of globalization, outsourcing and regional diversification of value chains capitalism could externalize social costs to countries like China, while at the same time pushing marketization of social policy institutions in the advanced economies. This was sustainable as long as profits flowed and was accompanied by taking risks in issuing piles of corporate debt even after the financial crisis. The Corona explodes this construction. Many companies will not survive unless government steps in. Unemployment will increase rapidly among the weakly protected groups previously mentioned.
The crucial question is: Will these emergencies also trigger new ideas how to organize the economy, as it happened with Keynesianism in the 1930s? Or will we just muddle through? This crisis is the chance to rethink capitalism as a system and to transform emergency measures into institutional innovations. Like with Necker cube, we must switch perspectives and imagine how the emergency measures might achieve a very different meaning if we radically change their systemic context, and if we generalize them and make them sustainable in the longer run. I discussed some ideas about a new system in a previous post, let me add one example here.
The crisis reveals that a strong safety net is indispensable. However, which form should it take? The crisis shows that universal, unconditional basic income combined with universal basic care (health, old age, pre-school) clearly would be a strong safety net not only for people, but also for the economy, in radically reducing income uncertainty in times of crisis. If governments are now forced into organizing broad support for the groups most affected by the virus, why not take the bold step and making that waterproof for the future? But this is not just the helping hand of the state, it revolutionizes capitalism: With universal basic income, people are free to choose whether they engage in the market economy, or not. This is a powerful means to balance power relations in society and contains the spread of markets across all social domains. In my view, universal basic income is one defining difference between capitalism and the market economy.
An institutional innovation like this cannot work without complementary changes in other domains, in this case the tax system and, above all, the institutional set-up of the not-for-profit sector of the economy to create alternative ways of work and income generation, in order to keep the level of universal basic income within the limits of fiscal capacity. Together with a colleague, Stephan Bannas, we have worked out a scheme that might succeed. But what is most essential, is the courage to launch such reforms in the midst of crisis.
The simple point is: There will be another Corona in the future. Our society and economy must build a strong immune system, also in terms of fending off the economic effects of pandemics. This system is beyond capitalism.