The Importance of Economic Thinking In A Pandemic

On the face of it, this pandemic might seem a peculiar case study to use as an introduction to economics.

A market economy is ordinarily characterized by a constant trial-​and-​error process of innovation by businesses, who adjust their product offerings or production techniques in accordance with prices and signals of profit-​and-​loss. Yet stay-​at-​home orders and nonessential business closures smothered this process by outlawing much commercial activity entirely.

Economists know that value is subjective: no bureaucrat, or anyone else for that matter, truly knows how much we each personally value our socializing activity. And yet, state governors were outlawing social gatherings, just asserting we’d be worse off collectively without government-​led attempts to mitigate the virus, without setting out how they weighed up this trade-​off.

Economics at its best entails a comparative analysis of different institutional frameworks. Yet the emergency responses in fiscal policy, trade policy, and even regulatory policy after COVID-19 hit overturned institutions and norms before our eyes.

It would be understandable, then, to look at this truly abnormal scenario and conclude it is the worst possible time to try to teach the building blocks of sound economic ideas.

But contra those instincts, I believe this past year remains an informative opportunity to highlight the essentials of economic thinking. For at its most basic, economics is really the study and evaluation of human choices, behaviors, or actions, in a world of constraints.

The new strictures on our lives the pandemic brought about stripped away the importance of habits, norms, and inertia that so often drive our day-​to-​day decisions. All of a sudden, we needed to make important new choices, on everything from how often to visit our grandparents to how governments should allocate the vaccine doses bought with tax dollars.

So consequential have these decisions been in affecting our lives, liberties, and health, that everyone is aware of them and has strong opinions about them. The pandemic has truly captured people’s attention. Yet one cannot possibly assess the wisdom of those decisions without having means to evaluate how and why they were made, and indeed what the consequences were.

Economics as a discipline provides such a toolkit. Infectious disease and epidemiological expertise is, of course, of great importance in a pandemic. But “the science” alone is not enough.

Whether it be the ability to think on the margin or weigh up the costs and benefits of actions, thinking about the role of financial incentives or how people behave in a world of uncertainty, economic insights have much to add in assessing the crazy year we have lived through.

As economist Pete Boettke has written in his book The Struggle for a Better World, liberal, humane economics, at its best, should be first a “tool of social understanding” and, second, a means of forming “social criticism of various proposals.”

My first book, Economics In One Virus, aims to do just that: using the broad example of the pandemic to exemplify a host of economic lessons and insights, but in doing so, developing an undercurrent critique of the pandemic response we all watched unfold.

The book’s chapters introduce those unfamiliar with economic terminology to everything from externalities to the value of a statistical life, cost-​benefit analysis through marginal thinking, moral hazard to public choice economics—all through examples from the pandemic. But in doing so, the book provides grounds to believe that behind the most consequential public health mistakes we’ve seen lay failures of decisionmakers to think as good economists would.

The regulatory framework for the approval of new diagnostic tests early on, for example, failed to accurately consider the costs and benefits of a more permissive regime, resulting in too few tests, the rapid spread of the virus, and unnecessary damage to market activity. We’ve seen repeated faulty implicit risk-​benefit analyses since then, whether on rapid at-​home tests or vaccines.

Public health officials have mistakenly thought of product markets as static and zero-​sum, to our detriment. They advised us not to buy masks last spring lest we use them up for those working in hospitals—completely ignoring just how quickly a market economy would have responded to surging demand. Politicians at the state level have likewise triggered anti-​price gouging statutes, which delayed the replenishment of barren shelves for goods such as toilet paper and hand sanitizer.

Overly crude lockdowns eschewed marginal thinking and were justified by epidemiological models that failed to sufficiently incorporate how human behavior would adjust to the presence of the virus. Attempts in certain states and countries to fine-​tune our behavior by turning regulations on and off to try to balance the path of the virus and market activity have proven about as effective as the Keynesian fine-​tuning of unemployment and inflation in the 1970s—with countries in Europe in particular ending up with a modern “stagflation” of high deaths and sharp downturns in output.

The tools of economic analysis, then, can provide us with grounds for analyzing the events we have lived through. But they can also help us to navigate key questions for the future: what drives under-​preparation for low-​probability, high-​risk events such as pandemics? And is there really a trade-​off between economic efficiency and societal resilience when it comes to international supply chains?

As retrospectives on the pandemic are written, it’s important that they don’t get too caught up in the very specific decisions that were made or the personalities that made them. The fundamental question that should always be asked is: what thought processes underpinned the choices that ultimately worsened this crisis?

My contention is that too often, a lack of sound economic thinking undergirded the actions that worsened this crisis. And so, despite how economically bizarre this past year has been, the pandemic presents an opportunity to highlight the power of economic ideas in both making sense of events and learning the right lessons for the future.