A tale of hubris, luck and ignorance

One cannot help notice three similarities in Covid-19 and the Global Financial Crisis

The context of the two crises, Covid-19 and the Global Financial Crisis, is different. However, one cannot help notice three similarities in the two crises, which are interconnected with one reinforcing the other. 

The first similarity is how hubris is central to both the crises. Just like economic history is replete with recessions, human history is replete with pandemics. However, each time we overcome a recession and pandemic, we become overconfident and rubbish the possibility of it happening in future.

Pre-2008, the world economy was undergoing high growth and economists credited themselves. They scorned off any possibility of a recession, adding, “This Time is Different”. In 2003, Nobel Laureate Robert Lucas famously remarked that the “central problem of depression-prevention has been solved” and “has, in fact, been solved for many decades”. 

In a recent article, Edoardo Campanella narrates a similar history of hubris in pandemics. In 1969, the US surgeon-general, William H Stewart, told Congress that it was time “to close the books on infectious diseases” and “declare the war against pestilence won.” Infectious diseases such as polio, typhoid, cholera etc. had been defeated by vaccines and antibiotics. The medical schools at Harvard and Yale even closed their infectious disease departments. Soon thereafter we saw the outbreak of the deadly HIV-Aids, SARS, Ebola, and Swine Flu in the 2000s. 

Second similarity is luck. In the pre-2008 period, some economists mentioned that luck played a role in the economic performance but was discounted given the hubris. This again finds a parallel in the pandemic literature. In 2006, the World Health Organization released a report on lessons from SARS (SARS—how a global epidemic was stopped). The first lesson was “We were Lucky this Time”! The SARS contagion was contained relatively quickly and we have relied on similar luck for all the previous outbreaks. Instead of paying attention to the source of these risks, which mainly came from China, the world was cheerleading the Chinese growth model. This luck seems to have run out now. 

The third similarity is ignorance. In both the events, there were warnings that a crisis was on its way but was ignored. In 1998, the US Department of Defense warned of the increased complacency that there would not be any epidemics. The World Bank and US Centers for Disease Control and Prevention had estimated that a pandemic would result in high economic co­sts. Hollywood even made a mo­vie named Contagion in 2011, which so closely resembles the current crisis. 

A related point on ignorance is that both the crises are barely mentioned in economics textbooks. Much has been written on the impact of the economic crisis and we are now learning that all these previous pandemics impacted the economy severely. In 1918, the Spanish Flu not just killed 5 million people but also impacted economies over the short, medium and long term. The grocery business sales declined by 40-70 per cent and the labour shortage impacted public services. The exposed pregnant women gave birth to children who suffered from medical problems later, such as schizophrenia, diabetes and stroke. The exposed cohorts had higher rates of physical disability and lower education and income.  

I checked leading textbooks of different times to verify this preposition. The once widely read textbook —Economics by Paul Samuelson and William Nordhaus — mentions communicable diseases to discuss issues such as: Whether health system should be a private good or a public good; how buying insurance after getting a disease is adverse selection; functioning of price signals during such disease and so on. The most popular textbook of today, Macroeconomics by Greg Mankiw discusses 14th century European plague to explain concepts such as marginal products of labour (which rose) and capital (which fell). 

The 2008 crisis led to a new book named The Economy, written by several authors. The Economy mentions diseases in a different and interesting context. It defines globalisation as “ideas, culture and even the spread of epidemic diseases”! Most other textbooks usually present globalisation highly positively with only gains. For instance, the leading textbook on international economics by Paul Krugman, Maurice Obstfeld and Marc Melitz discusses globalisation extensively but does not even mention the word pandemic/epidemic/disease! Similar fate is meted to the new edition of Macroeconomics textbook by Olivier Blanchard, which divides the book across short, medium and long term but does not even mention disease (and related words) even once. 

Jared Diamond wrote Guns, Germs and Steel, documenting human history. Similarly, one could write a book on crises impacting human life titled Hubris, Luck and Ignorance. With each crises, we prove the George Santayana aphorism time and again: “Those who cannot remember the past are condemned to repeat it.” One could add a few words to the aphorism as well: “And even worse is not to discuss this important history properly in the textbooks”! 

The writer teaches at Ahmedabad University