This interview was conducted by Javier Toro.
Hans-Joachim Voth is Professor of Economics at the University of Zurich and the Scientific Director of the UBS Center for Economics in Society.
In a normal crisis, and by that I mean a crisis due to natural disasters, for example, part of the production capacity is lost because part of the infrastructure or part of the manufacturing base is destroyed. There may also be some people who die, but the main thing happening is that production capacity is reduced. Pandemics are very different in the sense that they primarily kill people but leave all the equipment that we use to produce, all the machinery, all the factories, all the office buildings, everything, unscathed. Epidemics and pandemics are very special because they change the ratio of capital to labour. And this particular crisis is even more special because it has simultaneously caused both a demand shock and a supply shock. People have been confined to their homes, which means that they can’t do anything: they can neither shop nor produce. Consumption and production are tightly linked. The Great Depression, for example, made it clear how a decline in consumption can trigger a downward spiral to a full-blown recession. As people consume less, firms will start to produce less and lay off some of their workers, who will in turn consume less, and so on. Still, we know exactly what to do to put things right when the demand drops. And we also know, although it’s a little bit harder to achieve, what to do to fix things when the supply falls short. In this case, however, you have both a demand shock and a supply shock, and people must remain confined for the virus not to spread; that is, you basically have the seeds for a perfect storm. If firms die, you will still have the factories and machinery, but you will not have all the skills and know-how that are embedded in functioning firms.
They don’t always have negative effects, but the conditions for that to occur are quite special. Since they primarily kill people and leave everything else intact, survivors have the possibility to produce more effectively. Suppose that half of us die. Which firms do you think will hire the remaining workforce? It will not be the inefficient ones, the ones that cannot pay the new, higher wages. It will be the ones that can attract and retain people by paying high salaries. As a result, the average salary will go to the roof. Now, hopefully, we won’t lose half our population. But there is a case where that happened. During the Middle Ages, the Black Death killed nearly half of Europe’s population. All of a sudden fewer people could work the land. And since the overall supply of land is fixed, there was more land relative to the number of people who could work it. As you would expect, wages skyrocketed. I have argued that this temporary spike in salaries did have positive long-term consequences. It stimulated production and technological innovation and helped kick-start industrialization. Now, is something similar likely to happen this time? Probably not. Firstly, most of the people who likely will die are already retired, so there will be no increase in competition in the labour market. Secondly, confinement, which has never happened on the scale we are seeing today, prevents people from creating output —people who can produce are not producing. So it’s very difficult to see what positive things would come out of this crisis.
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