We’re in a global economic depression right now, due to Covid-19. Logical, right: lockdowns around the world, businesses completely shut down, people not working. But did you know economic depressions have a lot less to do with cold hard numbers than you might think?
A definition
Alright, so what is an economic depression? According to Wikipedia :
A depression is a sustained, long-term downturn in economic activity in one or more economies.
Wikipedia
Everything that people do or create has a monetary value, and the total sum of that value for a country is the gross national product. If that goes down for a longer period of time, we call it a depression.
In this case, people have to stay home, meaning they can’t go to a bar or restaurant, or the gym, or a number of other businesses. Those business don’t generate value, hence a depression.
The result is job loss, increases in national deficits, and all kinds of negative stuff. Pretty straightforward. Or is it?
Paper money
Well, let’s look at another tidbit from Wikipedia:
Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy
Wikipedia
Remember the bitcoin craze last year? Or the tulip craze of the 17th century? Yeah, okay; that last one is dear to my Dutch heart, but many people have probably never heard of it.
The main message is that money does not always accurately reflect value. However, as long as people believe it does, the paper value of something can keep its value.
Now, we know for a fact that a lot of people are not working. So, in this case, we know they’re not creating economic value. However, there’s something missing from the equation. We do know that all these people are now at home. They might be improving their homes, or — if they can, given the uncertainty — having a happy time with their families. Doesn’t that have value?
Maynard Keynes, the famous economist, once predicted his grandchildren would have a 15-hour work week due to automation. That hasn’t happened, obviously.
There’s also a huge positive impact of this crisis on the environment. Our normal modus operandi is extremely destructive to our own planet. Of course, destroying our planet does not have an economic value attached to it either. Or rather, the cost is in the future and we don’t take it into account now. As far as gross national product calculations are concerned, the environment and climate don’t exist.
So really, depending on how you look at it, we’re actually better off at the moment. Still, what about all those lost jobs?
Time, goods, and services
Let’s do a little thought experiment. Imagine we were in a world where child labor was still allowed and pensions didn’t exist. People would have to work from a few years old until they keeled over dead.
The pretty horrid image aside, let’s look at what happens if you were to suddenly introduce child labor laws and pensions. Basically, our make-believe world would transition back to our pre-covid world. Suddenly, all the children would exit the workforce, and all the pensioners as well. That would be something like a 20% loss of jobs, overnight. Economically, transitioning from that imagined world to our actual world would lead to an economic depression on the same scale as we’re facing now… wait, that can’t be right, can it?
The reason is that money is not an absolute, as we already saw above. Money is a means of applying a universal value to things and then using that value to exchange things. Money is a tool to divide scarce goods. On the one hand, people trade their free time for money, and on the other, they trade that money for goods and services, produced by materials and time spent working – from a haircut to an iPhone. Supply-and-demand, basically.
Looking at it this way, an economic depression is a disruption in the way we exchange time for goods.
Scarcity and bullshit jobs
So, the problem we’re facing is that a lot of people are not applying their time to working. On paper, this is very clear-cut. People don’t work, they don’t add economic value, hence, depression and lots of money lost to stimulus packages. We have to ‘make up’ the time we lost by not working during the covid stay-at-home period.
It gets worse. Because those not working don’t buy things, and others grow weary of spending, other business see falling revenue. They in turn have to fire people. This leads to a cycle of collapse until everything hits rock bottom and we start to climb back up. In the process, people change jobs and new business spring up, leading to a new normal where the value of things might have changed. For example, the collapse of the dot-com bubble led to the fall of a number of companies, then gave rise to Google and Facebook.
However, there’s a caveat. Jobs fall, yes. But a large part of the problem has to do with psychology. People getting nervous and not spending. Investors and banks no longer trusting they can invest money in things.
Bullshit walks
The underlying issue is with the mechanism we use to distribute scarce goods and services. The way we do that is of course by using ‘money’. Money earned by the time we put in… sort of.
If you look at the time-for-goods-and-services equation in more details strange patterns emerge. Some people spend their time managing large corporations and banks. They earn millions for the same time that a cleaning lady will only get payed a few dollars or euros for. Not just that, many people earn enormous paychecks by simply owning shares in a big company.
Nowadays, a lot has been automated, and it turns out, a lot of jobs don’t actually add value: the bullshit jobs. In essence, the system is rigged in strange ways. Keynes predicted we’d work 15-hour weeks, and that would be technically possible. However, we choose not to do that.
That’s a bit weird, and the Covid crisis is bringing some of that weirdness to the surface.
Another thought experiment
Let’s do another thought experiment. We’re in the covid stay-at-home crisis. However, what if we kept spending the money we used to? I have an IT job, so I can just keep working. Normally, I would go to a restaurant on occasion, or a cinema, and of course the expensive indoor playground. Imagine I would still wire the money over even if I wasn’t using the services. I’d still pay money for a restaurant dinner I hadn’t had, and an indoor playground entrance fee I wasn’t using.
Imagine we all just kept paying what we used to. The economy would keep chugging along largely the way it used to. Some business are temporarily not needed, but others could adapt to the social-distanced norm. We could ask those without jobs to help fix that, and we’d be set. On paper there would be a depression, but in reality everybody’s needs would be mostly met, until we slowly crawled out of the lockdown.
Unfortunately, we don’t do that. We refuse to do that.
If you look at it this way, depressions are partly in our heads. The reason: we’ve convinced ourselves we should only give money to people for working. Even though we know a lot of that work is bullshit to begin with. Even though we give that same money to our children and our elderly for free.
Of course, the above experiment is a gross oversimplification. How would we figure out who gets money and who doesn’t? Also, organized crime is already licking its fingers at massive amounts of money entering society without proper oversight. And it does feel pretty unfair that I would have to work long hours while somebody else can sit on their ass and still get paid.
Still, it’s good to realize that while many say an economic depression is just the logical result of covid-19, the fact is: this is the logical result of covid-19 combined with our political choice for unbridled capitalism. Of course, I don’t have a better alternative either. Although: taxing wealth and high incomes to get us out of this crisis might not be the worst idea.
Psychology
What I describe, of course, nearly amounts to the ‘dreaded’ communism, the great red danger that always looms over us. Well, guess what, no, communism is slightly different, but yes, I am a pretty socialist guy.
I don’t believe in communism, but I don’t believe in unbridled capitalism either. The first denies individual achievement and the latter pretends to be about fairness, but is in fact about the law of the jungle.
Capitalism lets ‘the market’ sort it out, which is code for ‘those who have power get money’. And something like this covid crisis can suddenly lead to a lot of people losing all their power, and so, all their money. I don’t think that should be considered fair.
That doesn’t mean I want to promote my own best way out of this crisis. No, my point is, we have to keep in mind that an economic depression isn’t because of some law of nature, it’s about rules we’ve set up ourselves, and have embedded in our culture over the years. Rules we could change, if we could think of better rules, and convince everybody to follow them.
The winners and the losers
How we fight this economic depression says a lot about who we are as humans. We could put it behind us relatively quickly. My guess is, in fact, that those countries most aimed at solidarity will pull through best.
China, well, they’re ahead, their country is a tyranny of solidarity. I’m not a fan, but the Chinese government already clamped down hard on the virus and are restarting their economy. Unfortunately for them, in a global economy, much of their paper wealth depends on demand from other less resilient countries.
For the EU it’s a bit more dubious, but solidarity is still a part of our values, maybe. This crisis does highlight the weakness of a federation of countries that only tie their economies together, but not their politics. The politics are going every which way now, but the economies can’t follow because they’re fused together at the hip.
As for the US, well, they’re screwed. The US have a president who personifies selfishness, and a rich uppercrust who will fight tooth and nail to keep the masses working to increase their riches and comfort, even if those masses start dying in droves. But, like the scorpion and the frog teaches us, maybe you shouldn’t kill those beneath you when they are also the customers that keep your businesses afloat.
So, a very bad economic depression is coming, and my bet is it will hit the US far harder than it will China. Europe will be in between. Which is what I think was already in the cards.
A shame really, but maybe we’ll learn something from it. I’d like that.
Really well put, Martin. Thank you