Optimism bias and the pandemic economy

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A shopping centre in Finsbury Park had no shoppers during one lockdown morning. 

Pre-covid life is unlikely to return in an environmentally unstable world. But our economic theories have yet to adapt to this new normal.

But if the economy isn’t going to grow like it used to, the question of redistribution comes to the fore.

Think back to the early months of covid-19, back in March 2020 or so. There was a widespread belief – encouraged, recklessly, by British prime minister Boris Johnson – that this would pass by quickly.

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I reckon the majority view in economics was broadly that covid-19 would be a short, sharp shock, but that since - assuming governments acted quickly to protect businesses and livelihoods - it involved no destruction of capital or real loss in productive capacity, the economy would rapidly rebound from it and continue on its way.

This was wrong, as some of us pointed out at the time. And it’s been damaging: it has meant a failure to prepare properly for successive waves of the virus, and I suspect that it means some supposedly temporary instruments – like vaccine passporting – risk becoming permanent fixtures of our existence in an increasingly securitised society as we fail, globally, to get on top of covid.


But approaching two years later, the optimism bias seems to persist. It takes a curious shape: that, since covid-19 isn’t a world-ending cataclysm, but instead means a near-permanent worsening of life for everybody without destroying civilisation or provoking some transvaluation of all values, there is a strong tendency to think covid will end at some point and pre-pandemic life will return.

This sunny view of a post-covid future isn’t only about the anti-maskers or those pretending the virus is a kind of flu we can brush off. The popular overestimation of the effectiveness of vaccines, and the underestimation of their dwindling effectiveness seems to be have a similar source.

For the avoidance of doubt: everyone should get a vaccine. Less than 100 percent effective is still very effective; six months of protection is still six months of protection.

We are well set, as a society, to perceive disasters that have a short duration, and then end. We can even conceive of the end of all human life.

Thomas Moynihan, in his recent X-Risk, argues that this perception of absolute finality is constitutive of modernity as such, separating pre-modern thinking from the mental world we inhabit today.

But we seem to have a serious difficulty in processing something that acts more like a chronic social disease: something that, most of the time for most people, acts to just make everything somewhat worse than it might otherwise have been: harder in certain ways, less enjoyable, more costly.

But if the economy isn’t going to grow like it used to, the question of redistribution comes to the fore.


Something like this optimism bias is strongly encoded into how we tend to think about economics. It’s not just a modelling problem: the belief that the wider environment is stable and can therefore be ignored is foundational to conventional “neoclassical” economics as such.

Notoriously, if the environment appears at all, it tends to turn up as a “externality” – as something separate from the economy and whatever model of the economy we are using, but which then intrudes.

So imagine, for example, that a pencil factory pollutes the air, and this air pollution causes more respiratory illnesses, raising the costs of healthcare elsewhere. The environment here appears after the fact of the economic activity. It is strictly external to that activity.

This is, as generations of ecological economists have pointed out, kind of nonsense.

Clearly we inhabit the physical environment before we start to build factories and poison the air: we are not, sadly, ethereal creatures of pure thought and beauty, but have to eke out an existence scrubbing around in grubby material reality, and this is fundamental to everything we do.


But by excluding the environment from how we think about the economy – unless forced to put it back in, once, say, childhood asthma cases become so frequent as to be unavoidable – we are making the implicit assumption that it doesn’t matter.

I don’t mean as a moral point. I mean it as an economic modelling point: that by excluding the environment, you have to also assume that the environment is irrelevant for all future conclusions in the model – that the environment is a passive support for whatever economic activity it is that you want to think about.

Incidentally, it’s a problem that persists across the discipline, in a weaker form. The schools of thought outside of neoclassicism, like post-Keynesianism or Marxism, tend also to simply take a stable environment – and therefore the prospect of unlimited future growth – as read. It’s an unexamined assumption of the model.

Now this may be fine if the environment, as a general rule, is broadly stable: that the environment can be thought of as sort of passive sink that we may, if we wish, decide to include in our modelling and our conceptions of the economy, but that we don’t have to.

You don’t have to include so-called externalities: by their nature, they are assumed to be external. It’s a matter of choice. If we are considering economic growth, we can make the strong assumption that a trend rate of growth exists, and whatever shocks do occur – those “externalities” again! – their effects will dissipate over time.


What if that no longer applies? There’s no real reason to think covid-19 is the last such pandemic we will encounter, for example.

The most likely culprits for further outbreaks are the influenza viruses that circulate amongst our livestock: mutating rapidly, in close proximity to potential human hosts, it has been influenza that occupies pandemic planning.

But even here, given the features of influenza relative to SARS-Cov-2 – lacking, perhaps most importantly, the asymptomatic but infectious period of covid-19 that has caused (and will cause) such mayhem – may well make it somewhat more containable, or at least make containment something closer to a forest fire than this slow-burn chronic social illness we now have.

That said, given that SARS-Cov-2 is so well adapted to the kind of society we live in, it does at least seem plausible that, should another zoonotic breakthrough occur and spread, it will have similar features: that if we find ourselves on the wrong side of a future pandemic, it will also have features similar to SARS-Cov-2, because we live in a society that SARS-Cov-2 is a good fit for. To the extent we ourselves have adapted to covid-19, this is less likely, of course.


So we probably won’t get an environmental calamity with quite the same destructive features of covid-19 in the future; or, at least, if we do we would need to be profoundly unlucky.

To put it in the crude terms of conventional economics: it does not seem likely that a one-shot global productivity reduction will occur because of a future environmental disaster, although this cannot be entirely ruled out.

But we can be near-certain that the succession of extreme weather events and natural disasters will increase in pace, as they have done for the last fifty years or so.

The cumulative effect of continual and increasing numbers of environmental crises is to radically increase the costs and difficulties of economic actions: we will find it hard to simply produce goods, as we are presently finding with (say) semiconductors; we will find it harder to deliver services, as we are finding with covid-19; we will find ourselves devoting more and more of our collective wealth to dealing with the costs of recurrent environmental emergencies.


If we take the environmental forecasts seriously, nothing in this says economic growth will return to trend. More volatility of growth in general – more peaks and troughs as the economy is beset by environmental disasters – and lower growth on average is surely a more plausible prediction.

This would be a break in the functioning of capitalism, equivalent to its initial drive into “inorganic” sources of energy like coal in the late eighteenth and early nineteenth century.

As Andreas Malm’s very brilliant Fossil Capital argues, it was the pursuit of stability against a dependency on the environment that saw early industrial capitalism switch from lower cost but erratic water power to higher cost but consistent coal and, later, oil.

This insight – that capitalism will substitute greater control for lower costs – is of exceptional importance, and I’ll return to it at a later date. For now, note that Michal Kalecki makes the same underlying point in his classic 1943 essay on full employment.

A capitalism buffeted by successive environmental disasters starts to look rather like its early, pre-industrial form: not able to produce regularly and systematically, but suddenly subject to forces that remained always outside of its control.


The problem of labour – which, annoyingly, remains the problem of managing people who, annoyingly, may have their own ideas about being managed – would be joined by and indeed, increasingly is being joined by, the problem of managing the environment.

Not one of extracting and using resources, which industrial capitalism is built around and upon; nor even the problem of managing specific, localised environmental problems – installing air-conditioning, say, where typical temperatures are otherwise too hot for office work – but something appearing at the macroeconomic level as a generalised instability.

Throw in, as we should, the capacity of the financial system to reinforce and redistribute that instability – taking, via the power of credit, failures in one part of the world and turning them into financial crises everywhere – and the prospects for future economic growth dwindle further. Regulators are increasingly alert to the prospect of environmental instability producing financial turmoil.

Add, more speculatively, the extraordinary resources being devoted to technologies that are just not very good at adding to growth in the aggregate – those immense investments in information technology that, one day soon, will surely produce a step-change in measured productivity, just not today – and it’s hard to sustain the sunny optimism that a two percent trend rate of growth implies.

But if the economy isn’t going to grow like it used to, the question of redistribution comes to the fore.


It’s no longer enough to either openly as in “trickle down” or implicitly - as in most versions of social democracy - assume growth will deliver for most people, because if it is hitting hard constraints, it won’t – not in the medium- to longer-term, at least.

Expect more squabbles over redistribution to come; the current arguments around inflation are merely a precursor to them.

Jo Michell has an excellent, short overview of why wage rises are to be welcomed, but interest rates rises opposed, in dealing with the current and ongoing bout of inflation.

If this alarming Financial Times interview is anything to go by, the Bank of England’s new chief economist, Huw Pill, could do with reading it. Otherwise, stagflation plus pandemic plus environmental collapse will be a fun combination in the next few years, I’m sure.

Richard Seymour has been pursuing the same thought about our likely future for some time. You can read his latest on the supply crisis over at his Patreon here.

Meanwhile, in scenes that I think/hope will be repeated in this country, the US is in the early stages of a strike wave. Across the developed world, the combination of dislocation from lockdown, some continuing pandemic restrictions, but a surge in consumer demand is causing labour markets to tighten.

For the first time in two generations or more, the balance of bargaining power is shifting in favour of labour and against capital. This is turning into wage rises, and – in a reverse of a decades-long pattern under neoliberalism – in both the US and the UK it is lower-paid workers who seem to be gaining most. Sharon Graham’s first address to Unite’s Policy Conference as the union’s General Secretary is a crucial statement of strategy here.

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James Meadway is an economist and former political advisor. Sign up for his new newsletter.

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