2007 - 2020

The Economics of the Pandemic

Iain Macwhirter’s Herald column on Sunday [Coronavirus: this crisis could bring a Great Depression, not socialism] makes a number of well considered points about the vulnerability of the Scottish economy in lockdown. Iain rightly points out that all aspects of the economy – including the public sector – are a financial house of cards: once some start falling over, you have real trouble all the way down the line. None of that is in question here.

Neither do I disagree with his assessment that there is no easy, quick-fix solutions either. Iain rightly points out that government injecting cash into the economy can only achieve so much if production grinds to a halt, as more cash chasing less goods can lead to dangerous price bubbles.

Where I fundamentally disagree with Iain is the conclusion he draws from all this. Stating that “we simply cannot lock down indefinitely” as “economic depressions also lead to significant loss of life”, Macwhirter goes on: “The Government cannot replace the economy. Attempts by communist countries to abolish the market and replace it with central control, as in Soviet Russia, were a disaster. That led to rule by oppressive and corrupt bureaucrats, gross inefficiency, widespread shortages, and the degradation of the environment.”

After taking aim at some “crass” comments from outgoing Labour leader Jeremy Corbyn, Macwhirter concludes that many socialists on social media are “revelling in the collapse of capitalism in the naïve belief that socialism is being constructed in the wreckage. It isn’t. Mass unemployment, poverty and insecurity is not socialism.”

We can break this down to three points, which we’ll examine in turn:

1) That the choice is between lockdown or a Great Depression
2) That socialists think Tory big state intervention is socialism
3) That the economic options are Soviet-Union style central planning or the economy we have

(The points above are expressed in terms which are probably blunter than Iain would, but I’m sure he will forgive a little rhetorical lee-way.)

That the choice is between lockdown or a Great Depression

Let’s say for the sake of argument that Scotland and the UK bucked the global trend and went full ‘herd immunity’, going back to original plans for allowing 60-80 per cent of the population to contract the virus. The lockdown is ended now. To be clear, I’m not saying this is what Iain is arguing for (he’s not), but as a thought experiment lets think through its economic impact.

A few things would happen. First of all you would have a lot more deaths. 260,000 in the UK, if the Imperial College London paper is correct. You would also have millions of workers sick for weeks, and thus off work at times that are unpredictable to plan for. The overwhelming of health services would mean much more sickness and death than otherwise. Other countries would take extra measures to lockdown their economy from the UK because it would be a plague island. Even if other parts of the world began moving to an end-the-lockdown-early model (which is perfectly possible, politicians from the centre-left Matteo Renzi in Italy to Donald Trump in the US are pushing for this), it is very difficult to see how an economy of widespread illness would not also suffer the sort of breakdown in global supply chains and in consumption patterns that is currently taking place and which is leading us rapidly to a Great Depression.

The point is, there is no common sense economic choice in this situation which can operate without widespread dysfunction: both a lockdown economy and a plague economy will lead to fundamental breakdowns in the capitalist economy. Indeed, such a breakdown has already happened.

To explain this, let’s look at the example of the New Meadowbank Sports Centre in Edinburgh, a case cited in Macwhirter’s piece as it’s construction has currently been put on hold.

It’s interesting to look at the details of the New Meadowbank. Alongside the sports centre, the project includes 2.2 hectares of “mixed use” properties, including hotels and student housing. This is typical of Edinburgh’s post-crash property boom, built around a Services economy of studentification, hospitality and mass tourism. Indeed, on the day of the first death from COVID-19 in Scotland, Edinburgh planners approved a new £350 million hotel which included a “hotel school”. As well as hotels galore, the city has boasted the highest rate of Airbnb’s per resident anywhere in Europe. Locals have complained of feeling like they are in a Disneyland film. But the property developer Prince has been turned into a frog by the kiss of Covid. The excesses of Edinburgh over-tourism has of this moment become a major economic vulnerability for the city. To put it simply: the tourists aren’t coming, and won’t be for a long time.

On the same day as the hotel school, the World Tourism Council warned 50 million jobs were up for the chop globally in tourism. Edinburgh is seeing landlords switch on mass from AirBNB to residential lets. The point is, the economy that Edinburgh and its construction workers have been busy building as of this moment does not exist. The fiscal crisis that Macwhirter speaks of for Edinburgh City Council from the collapse in its Services economy has been recklessly cultivated by successive councils which refused to listen to those who said it had to put the breaks on the property developers for its own sake and those of its residents. Coronavirus has merely exposed, not caused, these severe economic vulnerabilities in the Scottish economy, especially that of its hyper-commodified capital city. If you have any doubt about that, record that it was not COVID-19 that caused the devastation one can witness in Princess St Gardens at the moment. That was all the work of Underbelly.

A number of industries – most of all aviation, tourism and hospitality – are not in the current circumstances salvageable. Even with a plague economy model to resolve this crisis, capitalist markets will still collapse if left to their own devises. Either we let that happen and an awful chaos ensue, or we re-organise the economy in such a way that it allows us to contain the virus and stave off the worst effects of the crisis. As the economist Jonathan Portes has put it in making the case against sacrificing lives for the economy: “If we allow Covid-19 to permanently damage our economic and social fabric, it will be our own fault, not that of the virus.”

That socialists think Tory big state intervention is socialism

If anyone thinks that Boris Johnson and Rishi Sunak are ‘constructing socialism in the wreckage’, they need to stop dreaming. This idea that ‘big state equals socialist’ is not and has never been remotely correct. In Margaret Thatcher’s blitzkrieg years from 1984-1988 the state grew in size on average by 4.7 per cent per year. The question is not the size of the state, it is what it does, who it is accountable to and in who’s interests it works in.

The neoliberal era has not been one of small state – it’s been a different state. A state of bank bailouts, PFI, help-to-buy, business subsidies and housing benefit. Housing is exemplar: In the 1970s, over 80 per cent of the housing budget went on bricks and mortar, today 85 per cent is spent on demand-side subsidies to developers, landlords, buyers and renters. In other words, we have a state that acts to manage the capitalist economy in the interests of capital.

The actions in recent weeks of the Conservative Government needs to be looked at through this frame. Far from investing in public services, the business and self-employed bailout (while necessary) is actually about plugging gaping holes in the private sector.

As economics commentator Laurie Macfarlane has argued: “Even in countries with the most generous employee compensation schemes, workers are only being compensated for 80 per cent of their wages. But most of this will be required to pay for essential expenses, meaning that overall most workers will be left worse off.

“The flipside of this is that the income streams for the ownership class – rents, interest and corporate income – are protected. But crucially, because the discretionary spending of the rich has collapsed, their net incomes (i.e. their income after expenses have been paid) have increased dramatically. This is the key to understanding who ultimately benefits from all the new money that is being injected into the economy.”

Indeed, while everyone is talking about big state Tories, there is a growing crisis in public services, as Scottish local authorities have moved to slash homecare services to save cash to fight this emergency.

So there is no naivety from this social media socialist about what is happening, and when the government’s measures inevitably fail because they are wholly insufficient to resolve this crisis, the “mass unemployment, poverty and insecurity” which Macwhirter speaks of will be capitalism’s failure, not socialism’s. The question isn’t ‘state or no state’, it is what form of economic organisation do we want across the whole of society and ultimately who holds the power.

That the economic options are Soviet-Union style central planning or the economy we have

I confess to being a little sad that Iain threw up the Soviet Union to dismiss arguments for an economic model based on social planning. Is that really where we are? That it’s either a plague economy or a Stalinist economy? Do we really have to pass through tired Cold War debates from more than 30 years ago to be able to discuss how a crisis could be resolved with new ways of organising the economy?

To counter this, I will try a novel approach. That is, that the capitalist economy we have has some of the worst centralised, command and control features of planning, only with the aim being in pursuit of profit, rather than social good. The enormous corporations which dominate the global economy meticulously plan everything they do, using big data to constantly upgrade their efficiency by responding in real-time to shifting patterns of demand. Many of these companies also have a monopoly over whole industry sectors, especially the new digital platform companies, which essentially control the infrastructure in which much of our active lives now take place on (especially under lockdown).

And then there is the banks, which operate a form of “central control” identified by Macwhirter at the moment, through their monopoly on credit creation. In the United States, the Federal Reserve just last week handed these banks unlimited guarantees that they will guard against all and any losses. They call it “QE infinity”. The rest of the world is about to follow suit. Again, in what sense is this state-finance nexus not a form of monopoly capitalist planning?

The economy of social planning – where the bottom line of economic activity would be about meeting social and ecological needs – that I am talking about would see neither a dictatorship of the state or of capital, but a system of economic democracy, where long-term calculations about social and ecological need are built into the system’s DNA. It’s that fundamental short-termism of the present system which is why the world was so unprepared for COVID-19. If Big Pharma was not constantly thinking about shareholder value (which company’s are legally obliged to prioritise, remember), it would have continued the funding which had started after the SARS outbreak in 2003. Creating vaccines “requires decades of serious investment, even when demand is low,” James Hamblin, lecturer at Yale School of Public Health, writes.

“Market-based economies often struggle to develop a product for which there is no immediate demand and to distribute products to the places they’re needed,” he explains.

This does not mean the alternative to corporate suits is a bunch of bureaucrats running things from Holyrood. Planning could mean companies operate within a framework where a social floor and ecological ceiling are clearly defined, not that they have to be micro-managed from on high. Imagine, for instance, if Scotland’s businesses were currently owned and controlled by their workers in a system of cooperatives. There wouldn’t be a debate about whether to put workers at risk of illness through forcing them back early, or about whether to lay off large chunks of staff. The question would be: ‘How do we manage our way through this together?’

The example of the Mondragon co-operative in the Basque Country is flawed (what isn’t?) but it does show how a company can ride successive waves of crisis through re-organising working hours and pay in such a way as mass redundancies are always avoided if the general worker interest is put first. And it’s pay ratio of the top paid member earning a maximum of six times that of the bottom paid member shows how equality can be a useful tool for crisis adaptability, making business more agile and flexible.

Social planning isn’t an anti-business agenda, it’s an anti-corporate power agenda. The small business owners which are currently being asked to put up their personal property as collateral to get state-guaranteed loans out of the banks have little to gain from socialism for the City of London and capitalism for the rest of us.

Macwhirter is right to say that “government cannot replace the economy”, but it can control the economy. Fundamentally this is a debate about whether citizens are masters of the economy, or the economy’s performance metrics – GDP growth and profit – are the masters of us, to the point that we’d be willing to sacrifice public health rather than re-order the system. Let’s remember that before Covid-19 came along, we were all drifting along towards climate catastrophe, because we couldn’t break free of capitalism’s bottom-lines.

Now that we’ve been knocked off that course, we don’t have to put the train back on to the tracks, start the engine again and suffer the consequences. Apart from anything else, that plague train will be very wobbly indeed. It’s in moments of disruption – not serenity – that it’s possible for a new world to be built, fit for the challenges of the 21st century. The alternative is to allow an awful chaos to ensue, where the orthodoxies of the past impose themselves dysfunctionally on the present.

Macwhirter is right that there will be no socialism borne automatically out of capitalism’s inability to cope with a pandemic. A new world will have to be fought for, tooth and nail. As Ben Gummer, a former Cabinet office minister who has studied the Black Death of the 14th century, writes, pandemic’s in and of themselves change nothing, they merely exacerbate pre-existing tensions and conflicts.

“Change is evidence of life, not the dead hand of pandemic death,” Gummer concludes.

Very true. So let’s bring it to life.

Comments (18)

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  1. John M Bryden says:

    This is a good piece! We will not progress during or after the pandemic by going back to tired old arguments about soviet communism as the only alternative to state sponsored capitalism. We need to understand the powerful interests that have taken control of the world since 1970’s, and how to control them in the interests of all.

  2. Maggie Mellon says:

    Great article by Ben – Question that’s needing asking is whether as in classic depression weaker capital goes to the wall still holds with this crisis. Lots of small viable businesses are going to go to the wall – will their local roots and benefits disappear and corporates buy them up for peanuts when business starts up again? Can we organise to make cooperatives out of bankrupt businesses instead?

  3. John S Warren says:

    Thank you for this. For what it is worth I agree with much of what you have written; particularly your trenchant criticism of this binary choice : “That the economic options are Soviet-Union style central planning or the economy we have”. I was trying to make roughly the same point, before McWhirter wrote his article (because this, after all is the easy or lazy resort of those defending the ‘status quo’), in Bella Caledonia a few days ago, with ‘The World Turned Upside Down’; although I was more struck by the bleakness and apparent lack of constructive prescriptions in McWhirter’s piece than any defence of the status quo.

    We would all be much the better informed and equipped if we began by avoiding all ideology – like the plague. Most solutions that will work are practical and pragmatic; and it is not beyond the wit of man and woman in society to devise functional and satisfactory solutions for the appropriate matters that are best solved by the public or the private sector. The sole test should be experience. We can see what works, and for whom. This requires only that we realise that both public and private sector have their important part to play, that the interplay between them is more nuanced and complex than ideologists of the Right or Left wish to admit, and that they may even require to be exchanged or recalibrated as different circumstances arise.

    Often the critical matters we need to address, and perhaps think about differently or take novel or distinctive issues into account, have been addressed by contemporary (or near contemporary) writers and thinkers on economics, banking or business, provided only we do not pretend any ‘authority’ is infallible. For those who wish to browse, in some of areas of economic life that do require more attention from us than is provided by the Household Budget School of Economic Theory; I might suggest Hyman Minsky, Randall Wray, Stephanie Kelton, Thomas Piketty, Gabriel Zucman, Mariana Mazzucato and Shoshona Zuboff; just for a start. None of them are either neo-liberals or Stalinists. Who knew?

  4. Dougie Blackwood says:

    I live in a relatively small town of Helensbugh. I have to walk the dog every day and find that almost every street is deserted. The large majority of the population is observing the instructions and I think we have relatively few virus cases locally.

    We do not seem to be spreading the virus and most people are keeping themselves safe. This situation may continue for the suggested 6 months, then what?

    We might have the speedy production of a vaccine to save the day but that may be more hope than expectation. Without a vaccine as we try to relax the restrictions we will have another surge in infections and might have to have another lockdown.
    The truth is that we need either a vaccine or sufficient numbers infected and subsequently immune to prevent any resurgance of the virus.

    I am not optimistic that the crisis will pass any time soon and restarting economic activity may take a long time after that. Welcome to a rerun of the 1930s recession.

    1. Jo says:

      Dougie

      “The truth is that we need either a vaccine or sufficient numbers infected and subsequently immune……”

      This argument worries me. I’ve heard people asking if, when someone has survived the virus, it means they are automatically immune from contracting it again, or, if some immunity is provided, is it temporary or permanent.

      The answer, after a load of padding, was, “We don’t know.” That’s where we are.

  5. The Over Extended Phenotype says:

    Weird that both journalists can ponder the future whilst completely forgetting that we are in the midst of a climate emergency. The future isn’t capitalism recovering from global recession or socialism born out of global recession, the future is more chaos. Chaos like we saw in Australia a few months ago – bushfires, followed by flooding followed by virus.
    Covid 19 is merely the dress rehearsal. Expect a rolling panic.

    1. Ben Wray says:

      “Let’s remember that before Covid-19 came along, we were all drifting along towards climate catastrophe, because we couldn’t break free of capitalism’s bottom-lines.” – I don’t think I did forget we’re in a climate emergency…

      1. The Over Extended Phenotype says:

        But in the very next line you say – ‘Now that we’ve been knocked off that course, we don’t have to put the train back on the tracks…’ – which seems to suggest that you think that Covid 19 has brought the climate crisis to a halt. It hasn’t. A temperature rise of at least 3 degrees is guaranteed given that CO2 can stick around for hundreds of years.
        I would love to see the radical changes you call for but I think we have left it too late. I find it difficult to imagine that we can make massive societal changes whilst in the middle of a global recession and climate chaos.

        1. Ben Wray says:

          I think you’ve misunderstood the line you reference. The ‘train’ I refer to is the global capitalist economy – it’s been knocked off the tracks. Elites want to find a way to get it back on the tracks again, and we have to say – ‘nope, that won’t work and the old train isn’t fit for purpose anyway – we need a new economic system fit for the challenges of the 21st century’. And: it’s never too late. Never give up. A new world is built in moments of crisis, not moments of serenity. Pessimism won’t help us get there.

          1. The Over Extended Phenotype says:

            Ok I see your point but you also say that ‘we don’t have to… suffer the consequences ‘ I’m afraid we do. It’s impossible to emit gigatonnes of CO2 for decades and not suffer consequences. The rise in temperature in the coming decades is baked in. It’s the result of past emissions. This isn’t pessimism it’s physics.

  6. Iain Macwhirter says:

    I do not say that the Meadowbank project should continue despite coronavirus. I say that we should accept the advice of the CMO and close building sites, even if journalists think that is a step too far. Please correct that because your article is misleading.

    I used Meadowbank not as an example of best practice in economic development, but simply as a means of illustrating the network of economic and financial relationships that extend far beyond any one project.

    The purpose of the article was to warn people on the left of confusing economic collapse with socialism. As Nouriel Roubini points out, we are more likely to see a Great Depression.

    1. Jo says:

      Iain

      “……even if journalists think that is a step too far.”

      I say this with respect, honestly, but what journalists think is irrelevant. Opinion columns are simply that, just another opinion.

  7. w.b. robertson says:

    great that people are beginning to consider and debate how our society could and should operate post virus. But it seems to me that the SNP and Nicola should have been coming out publicly with their blueprint for the New Scotland …. long before we had ever heard of coronavirus. Shouting slogans and marching through the streets is hardly enough.

  8. florian albert says:

    Scotland faces its gravest economic crisis since the industrial collapse at the start of the 1980s. If it continues beyond 8 – 10 weeks, it may be even worse.

    It is worth looking back at what happened then. It was a dreadful time for the industrial working class. Importantly, Scottish society had no real answer; short, medium or long term. Instead, market forces did their worse and – then – did a bit better. There was a recovery of a sort though it is difficult to think of a single Scottish industrial town which made a complete recovery.

    Will Scottish society perform better this time ? There is some hope that it might. The Tory and SNP governments recognize the need keep as much as possible of the productive economy on life support. Whether they have the administrative competence to do this might be a bigger worry.

    I do not regard ‘social planning’ as a realistic way forward. Who will the social planners be ? The people who planned the Curriculum for Excellence for Scottish schools ? The ones who planned Edinburgh’s trams ? Or Edinburgh’s Sick Kids’ Hospital ? At least such planners had the legitimacy of working under the instruction of an elected government. Are we going to acquire new planners or new politicians who will give them better instructions ? Neither outcome strikes me as likely.

    The example of the Mondragon Co-operative is cited. When it started, in the 1950s, Scotland had a massive co-operative movement. It was the biggest retailer in the country – probably by a factor of 10. The co-op movement failed massively in the second half of the 20th century. You can’t avoid asking why such a large experiment in social planning failed ?

    1. Brilliant. Yeah Florian the experiment failed because people like you took charge.

      The market that you worship at is failing, has failed and will fail.

      Your lack of faith in anything other than it is noted, but in the circumstances, I’m not sure what we do with your quaint faith?

      1. John S Warren says:

        To be quite fair, Mr Albert, I believe, respects ‘social democracy’, with Germany as a model. Fair enough. Only, this isn’t Germany. This is Britain; after ten years of bungled Conservative leadership. Oh, dear.

        Allow me to make a fair comparison between Britain and Germany that is contemporary, and not without some importance to the people of both countries. In the current Pandemic, Germany planned for and already possesses 25,000 ventilators (almost 5 times the number possessed by the UK), and is currently providing 500,000 COVID-19 tests a week. Britain is struggling to do even 10,000 tests per day (70,000 per week). Britain is now struggling to acquire sufficient testing kits and ventilators. You catch the drift. I know it may cause Mr Albert some pain, but I hazard the Germans have been doing some worthwhile planning; but without any planners, of course.

        1. florian albert says:

          My comment was plainly a response to Ben Wray’s suggestion about how we might build a better society/economy in future. It was not a comment on how to deal with the present emergency.

          With regard to the present crisis; plainly Germany is doing very well and the UK – and Scottish government’s – responses have been singularly unimpressive.

          A couple of points might be made about Germany’s success.
          Their health system is significantly different to the near monolithic NHS.
          German tax payers are willing to pay more than tax-payers in this country for their welfare state.
          If you look at other countries in Western Europe, their performance is less impressive.
          Deaths per million population;

          Germany 10
          UK 35
          France 60
          Nether. 68
          Belgium 72
          Switzer 54

          For me, France stands out. The French have long been proud of their health system yet it appears inadequate facing the immediate task. That is a sobering thought.

          1. John S Warren says:

            Germany yesterday. France tomorrow. Which country will it be tomorrow? Or, I wasn’t talking about this, I was talking about that. I already commented somewhere else (that was your response on another thread).

            I have made the mistake of attempting to have a discussion with you before. As far as I can see you have two solutions when you argument unravels; the first is to set up a Straw Man argument that was no part of your interlocutor’s proposition (Ben Wray quite deliberately distinguished between different interpretations of social planning; you simply reconflated them, to make an easy, lazy target), and then you knock it down. Big Deal. The other is your preposterous argument on the ‘World Turned UIpside Down’ – I really discussed this somewhere else and forget what I said; look at Germany. Enough said. Finis.

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