Will The Pandemic Accelerate The End Of Capitalism?

The response of many western governments to the pandemic has been to collapse their economies and maintain social support through a very large fiscal expansion. Some observers have questioned if this would herald the demise of capitalism as a means of organising our affairs? Does the pandemic herald the end of capitalism? 

The operation of capitalism as a social system relies upon the market for the distribution of goods and services. It is a monetary system, using price signals as an allocation mechanism, and the profit motive as a motivational driver. Key to the system is the exercise of personal choice in determining what to buy and when to buy it. Some goods need to be purchased collectively, which calls for governmental provision that is funded through the tax system. Another important role for government is to regulate the markets and to correct for market failure. In making the distributional decisions about taxes and subsidies, a collective decision framework is called for. In the western liberal democracies, this is in the form of representative government. All of this has ceased to operate during the pandemic.

The market is still used for the distribution of goods and services, but consumer choice can only be exercised during lockdown for 'essential goods'. The lack of a clear definition of what is essential and what is not has been something of a legal question during the pandemic so far. Absurd cases have arisen, such as the denial of the Welsh government that female sanitary products were essential. This interruption of the market has had two effects that may store problems for later on. First, it means that, owing to the high levels of income support, households are generating higher than usual levels of savings. Second, because people are not spending, and because government assistance is aimed at income support, profit levels are falling and the closure of firms is accelerating. Capitalism operates as a 'Money-Go-Round', and if one element seizes up, then the whole system becomes fragile.

There has been little public consultation over any of this. The organs of representative democracy have been suspended. The English local elections scheduled for May 2020 were postponed and it is currently uncertain whether or not the English local elections, the English mayoral elections, and the elections to the Scottish and Welsh Parliaments will go ahead as planned in May 2021. In place of a representative democracy, and autocratic technocracy has assumed control of the government, with key decisions being made by 'scientists and experts'. The scientists and experts who have assumed control display the British desire to centralise and the risk aversion of the British Civil Service. The population has been largely compliant so far, but rumblings of discontent and non-compliance with the regulations are starting to grow.

The key question is whether or not this represents the end of capitalism? Much depends upon how temporary these measures turn out to be. If a high level of vaccine delivery can be achieved, then the economy and civil society can start to thaw sooner than otherwise. This is the critical uncertainty. If a thaw can be achieved in the near term, then the process of normalisation can begin at the same time. If a thaw cannot be achieved, then the Conservative government of Boris Johnson will achieve what Jeremy Corbyn failed to achieve in two general elections - a Socialist Britain.

Two cases during the pandemic have given us a hint at what that might be like - the NHS Test and Trace App and the Oxford Vaccine. A test and trace facility is key to the management of the spread of the COVID virus. Despite there being commercial options available, the NHS decided to develop its own tracing App. The scientists and experts took control and the centralising tendency in NHS management took over. The result was far from the world beating App that was promised. The actual result - at a cost of just under £12 billion - was a non-functional App. In the end, a functional App was developed with the assistance of Apple and Google. The episode highlights how life could be if normality does not return.

By way of contrast, an effective vaccine was delivered in record time. This came about because sufficient government money was pledged to cover the cost of the initial research. This was handed on to the competitive oligopoly of the pharmaceutical companies to commercialise. It then received regulatory approval in record time and is now being delivered by private firms on contract to the NHS. If anything, this case demonstrates the best result of capitalism. A worthwhile social purpose - mass vaccination - that is underpinned by the government is being delivered by private sector companies. This represents the system working as it should.

This is an important point as we go forward. The emergency socialism of the pandemic has managed to ensure that public health is maintained and that households are not impoverished. This is a major achievement. But as we look beyond the crisis period, the public sector is unable to deliver goods and services effectively. There needs to be some return to the market and that needs to be underpinned by a return to representative democracy. It is quite likely that the pandemic will have rejuvenated capitalism rather than hastened its demise.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

How fast will Europe recover from the pandemic?

It's always the case that one thing leads to another. The study of the future often consists of no more than simply joining all the dots to see where we arrive. The pandemic has provide a number of opportunities to engage in this type of thinking, both for the near future and for further ahead. The most striking aspect of the pandemic is that it has had a different impact in different countries. The virus is broadly the same, saving a few mutations, so much of the differing experiences of the pandemic are the result of policy decisions.

Some countries have risen to the challenge of the pandemic very well. Others not so well. However, as we progress through the second wave of infection, we find that those who did well in the first wave may not be doing so well through the second wave. The key difference between the first wave and the second wave is the vaccine. This is a question of policy approval, adoption, and roll out. The race is now on to vaccinate as many people as quickly as possible. In this, performance to date is rather patchy.

The question of Europe arises in this context. Generally speaking, Europe had a good first wave, especially when compared to America. Lockdowns were imposed sooner and with tighter conditions than the US. Infections rates were lower, as were death rates. The economic policy response was slower in the Eurozone - it still has to be deployed - and frugal to the point where some may question its usefulness. This suggests that the economic fallout from the pandemic will be harsher and longer lasting in the Eurozone compared to the US.

America went into the second wave with GDP more or less restored to where it had been a year earlier. Europe, on the other hand, was operating at about 10% lower GDP than a year previously. This is now where institutional factors start to have an impact. The roll out of the vaccine is derogated to national governments in Europe, whereas the approval and roll out is determined at the European level. This hasn't been as nimble as it could have been. The approval and deployment of the vaccine has been slower than the US. Joining the dots, it means that the return to 'normality' - whatever that may mean - will take longer, periods of lockdown and will be longer, and periods of economic inactivity will be longer. This suggests that the Eurozone economy will be hit harder than that of the US over the course of the pandemic.

It is hard to assess the consequential impact of this because we don't know the point to which the Eurozone will recover. We don't know the likely path to recovery. We can only assume that the fiscal response will be sluggish and that the ECB will continue to pump liquidity into the system. All of this suggests a rather stagnant recovery that will be delayed compared to other economies. 

As things stand, there is the potential for this to develop into something more serious over the longer term. A delayed and sluggish recovery could permanently scar the Eurozone economy, leading us to question if Europe could ever catch up? A stressed recovery could see the flaws in the architecture of the Euro become fissures. Of course, many have speculated on the demise of the Euro before. They have been wrong, but there is always that nagging sense that perhaps this time might be different?

Stephen Aguilar-Millan

© The European Futures Observatory 2021

How Will The Pandemic Affect Productivity?

By placing the global economy into deep freeze, governments across the world have triggered one of the deepest economic downturns in living memory. In England, the present downturn is said to be the worst one since 1707. It is hard to find much upside to this, but perhaps some solace might be found in the question of productivity?

It is normally the case that a deep recession will raise productivity within an economy. It is usually the case that lesser productive firms go to the wall, releasing the staff and capital that they used into the pool of available capital and labour. At that point, as a matter of sheer arithmetic, the average levels of productivity will rise. As we go forward in time, new firms will be formed, drawing upon the pool of available labour and capital, to raise the total level of productivity in the economy. This is how the process of Schumpeter's 'Creative Destruction' works. 

The process of creative destruction has not been evident following the global financial crisis of 2008. Within the advanced economies, a sustained slowdown in productivity set in that suggests a more muted recovery from the pandemic might be the order of the day. There are three broad explanations as to why this might be. First, it may be the case that the impacts of the newer technologies - AI, Cloud Computing, and Robotics - have been over-exaggerated. Second, it may be the case that investment in the newer technologies has been constrained by weakened demand. Third, it might be too soon to see the impacts of a new adoption curve. All three of these may be right, in varying degrees, but what does that tell us about the years ahead?

The pandemic has made us do things differently. One factor noted by many observers is that much more work is now being undertaken from home. It is uncertain whether or not this makes us more productive. In some cases it will, and in other cases it won't. Either way, a combination of the new technologies - AI and cloud computing in particular - have enabled this trend. For some, this will be the way of the future. For others it won't. We might reasonably expect to see more home working and fewer trips to a centralised office, so perhaps those who declare the end of the office might be a bit premature?

It is not only in the uptake of new technologies that might contribute to a productivity uptick. The need for social distancing is forcing businesses to organise their production differently. We are all familiar with the growth of home delivery becoming incorporated into business models. The internal organisation of work teams and the flow of work through complex business processes has also had to change. Some of these changes represent real improvements to productivity. Some enhance the quality of output - a disguised productivity gain. These changes are likely to be retained after the pandemic, raising the productivity of the surviving firms.

After a long period of stagnation, we can be optimistic about the prospects for productivity in the years ahead. The fiscal response of expansion - rather than austerity - will help to underpin corporate profits in the near future. Contrary to the Piketty model, the rates of corporate profits following the global financial crash had been falling. If they start to rise again, we can reasonably expect corporate investment to rise again, especially if coupled with public investment in digital infrastructure and education. It is possible that both supply and demand factors could act to spur productivity in the near future.

One further long term factor may act to enhance productivity - demographics. In the next few years, a natural process of labour shedding will gather pace as the Baby Boomers retire in ever increasing numbers. This will have an effect - in the absence of mass immigration - of leading to wage rates hardening. In some case, by a great deal. If labour becomes appreciably more expensive, then a cost advantage for mechanisation arises. This is the point where AI, cloud computing, and robotics are likely to dominate as trends. If this is the case, then productivity could be set to rise substantially.

It remains to be seen how much of this is the result of the pandemic and how much would have happened in any case. Prior to the pandemic, the government had announced an end to austerity and had signalled an intention to develop both the physical and digital infrastructure of the UK. The ageing of the Baby Boomers has only been marginally impacted by the pandemic and their departure from the workforce is relatively independent of government policy. In this respect, the pandemic will not have influenced productivity greatly. 

What the pandemic could be claimed to have done is to accelerate the trends already under way. In the public sector, in particular healthcare, the adoption of the new technologies has greatly accelerated over the pandemic. For example, family doctors are now far more productive owing to video consultations. Although austerity had ended, it was not envisaged to have ended with quite the fiscal expansion that we have actually seen. In this respect, existing policy is far more exaggerated than originally planned.

Perhaps that's how the pandemic has affected productivity? Perhaps the pandemic has forced us to do what we were doing in any case, only more so? To that extent, it could have a lasting impact.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

UBI and the pandemic

One of the difficulties in the social sciences, when compared with the physical sciences, is that it is hard to experiment with the subjects under review. This means that social scientists have to take their data points wherever they arise, often using a set of surrogate readings to either confirm or refute their previous theoretical conjectures. The scientific method in the social sciences is essentially inductive. Data points are observed and theoretical underpinnings are conjectured.

In recent years, there has been a growing belief in a Universal Basic Income (UBI) as a means to resolve the issue of inequality. The proponents advocate this policy as a means to deliver a decent basic standard of living to everyone. This would be achieved by everyone receiving a regular payment without any strings attached. It would allow people to study without having to earn a living, it would allow people to have a financial firebreak to start a business, and it would allow people to focus on unremunerated care giving. The absence of being forced to earn a living would allow the innate creativity within people to flourish.

There have been a number of limited trials of UBI. The results of these are best described as mixed. None have been a resounding success. The supporters of UBI hold that the trials have been poorly implemented, the payments not entirely unconditional, and the levels of funding too low to hit critical mass. All of this is true, but it disguises the principal objection to UBI - the cost. For UBI to be at all effective, the recipients have to receive a significant sum of money. Across a population, that presents a taxation challenge.

Prior to the pandemic, UBI as a proposal was quietly falling out of fashion. It is expensive and is seen as an inferior policy device when compared with payments targeted on those who need them. The pandemic has changed that perspective. As an employment support measure - in the UK - the government entitled all staff to a payment of 80% of their salary. This is conditional. The conditions are that the staff do not work in their jobs. They can get a different job. They can stay at home and do nothing. They can engage in their hobbies or even start a business. They can do anything except return to their jobs during the furlough period.

This is almost a surrogate for UBI. The take up of the furlough scheme (somewhere between a quarter and a third of the UK workforce over 2020) was large enough to make this a statistically significant sample. On the issue of cost, it is difficult to fix this because a variety of schemes were under way at the same time and rates of fraud were exceptionally high. However, the cost of the furlough scheme between March and September was estimated by the National Audit Office as something n the region of £47 billion. Simply multiplying the numbers up suggests that the total cost of a UBI of £2,500 per month (the furlough ceiling) for the UK workforce (about three quarters of the population) would be in the region of £350 billion to £400 billion a year. These are the rocks of affordability upon which the ship of UBI flounders.

There then arises the question of the benefits of UBI. It is supposed to unleash a surge of creativity. Has that happened under the furlough scheme? Admittedly, it is a bit early to tell in definitive terms, but some early indications do highlight the direction of travel. We ought to discount what people reply to surveys and look at how they deploy their cash. This is a more revealing approach. During the furlough period, companies selling pizza deliveries are reporting record sales. Streaming TV services are reporting record subscriptions. Even adult web sites are reporting high subscription levels. There doesn't appear to have been an outpouring of literature, or fine art, or music. The expected wave of creativity has yet to materialise. What does that tell us? Perhaps people would rather watch TV eating pizza than locking themselves away to paint that masterpiece? As I said, it is too early to be definitive on this matter, but the evidence there is points in one specific direction.

No doubt the more resolute promoters of UBI will say that the evidence is tainted, or that we have drawn false conclusions from a limited data set. These are valid objections. However, most unbiased people will see that this is an experiment that has proven to be very costly and has yet to deliver the promised results. It has little to recommend it. Perhaps now, as an idea, UBI can die a quiet death?

Stephen Aguilar-Millan

© The European Futures Observatory 2021