By Darcy WE Allen, Chris Berg, Sinclair Davidson, Aaron M Lane, and Jason Potts
The global policy response to the COVID-19 pandemic has been extraordinary. We’ve seen a massive increase in government spending and social welfare programs, heavy handed policing, and some less remarked on crisis deregulation.
But the long run effect of the pandemic will be even more substantial. COVID-19 is driving far deeper, and profound, changes in the economy.
Some of these changes we can start to see already, but their full implications are still murky and distant. Nonetheless, as we argue in our book Unfreeze: How to Create a High Growth Economy After the Pandemic, the economy will not simply snap back into place. The post-COVID-19 economy will not look like the pre-COVID-19 economy.
Here we offer seven changes that have big consequences for policymakers, entrepreneurs, and employees.
1 — Digital acceleration
COVID-19 has massively accelerated the adoption of digital technology to facilitate work from home. But also shop from home, school from home, telehealth, and so on.
This digital shift is often remarked on but not well understood. Technology adoption normally follows a particular diffusion trajectory. Digital technologies that have significant scale effects must overcome behavioural and institutional resistance, and they can get stuck at take-off. This means that the productivity benefits from widespread technology adoption, especially infrastructural and production technology, can be very slow to realise.
COVID-19 arrived at a critical time in the history of technology — when a supercluster of digital technologies were forming, poised to disrupt the underlying infrastructure of the economy. This suite of digital platforms and technologies had been developing for the past several decades. But they had run into innovation constraints caused by coordination adoption problems and regulatory barriers.
In March 2020, many of these constraints suddenly vanished. The spread of online education and telemedicine, which had been until then a multi-decade process, occurred in a matter of weeks.
This was a massive, global, multisector, virtually-instantaneous coordinated adoption of digital technology. That’s utterly incredible — and perhaps unique in the history of technology adoption.
A major problem with platform technologies is to drive coordinated adoption. The pandemic did in a few weeks what decades of government effort had failed to do. Long-run that is very good. But short-run it is highly disruptive.
2 — A need for massive entrepreneurial adjustment
In Unfreeze we argue that there is an urgent need for entrepreneurs to adapt to the post-COVID-19 world. Economies are made of connections, information, contracts, webs of value, relationships. When we try to restart the economy, much of this connective tissue will be gone.
The rapid technological acceleration driven by the crisis creates its own unique needs for adaptation. We’re already seeing the formation of new consumer preferences, new types of jobs, new types of business models with new cost and demand structures, new patterns of supply, and new regulatory and legal uncertainties.
But this implies that a significant amount of human capital and physical capital (built for industrial era technologies and business models) has rapidly devalued.
The first priority for entrepreneurs in the post-COVID-19 economy will be understanding how particular markets and jobs and administrative functions have changed. For example, many restaurants have moved to take-away only. Will consumers expect those new services to continue? Much of the white-collar economy has moved to work from home. Will employees demand that continues?
Entrepreneurial skills are essential during periods of rapid change. Entrepreneurship is not something that can be supplied by governments. But it can be inhibited. Policymakers have to make sure they are facilitating — not impeding — entrepreneurial adaptation to the accelerated digital adoption triggered by COVID-19.
3 — Decentralised production and innovation
One consequence of this sudden digital uptake is increased decentralisation. With the rapid adoption of work from home — not just the technologies but the social practices — we’ve seen a shift in the locus of much economic activity from offices into homes.
This shift has several implications. One, it facilitates greater co-production of value. More household resources, including especially local information, are being mixed into production.
Two, this also shifts the sites of innovation, facilitating greater household innovation and user innovation. More innovation occurs in the commons rather than in markets and organisations. This in turn increases the need for trusted decentralised networks and, in turn, increases the demand for and use of distributed innovation technology and institutions.
Three, distributed production will require more distributed dispute resolution mechanisms. Traditional courts have been slow to adapt to the digital environment and parties will be looking to more agile forms of alternative dispute resolution.
Four, because more production and innovation is occurring in households and in the commons, this means that it is harder to measure value creation and improvements in these non-market contexts. The non-market part of the economy will increase in apparent scale. So our industrial era measurements of economic activity (like GDP) will need to catch up with these new digital era realities of value creation.
This new institutional economic order will require a new economics to make sense of these new patterns of consumption and production, and new digital forms of capital and value creation.
4 — Powered-up economic evolution
The pandemic is a selection filter. As the precursor and mechanism of many of these changes, the economic consequence of the economic policy response to the viral pandemic is a powerful evolutionary selection mechanism passing over the global economy and through each sector.
This brutal selection mechanism is causing job losses, contract terminations or renegotiations, demand reductions, business closures and bankruptcy, fire sales, credit shrinkage, asset repricing, factor substitution, and other distinct forms of economic destruction that will play out over the coming months and years.
This hard evolutionary selection mechanism is also a filter. It will kill off some things disproportionately and let other things pass through. Most obviously, digitally enabled businesses and sectors will do better, because they are more well-adapted to the new environment. Bigger firms with better capitalisation (or better political connections) will do better, and smaller firms will be selected against.
In labour markets some positions are more vulnerable than others, particularly part-time workers or contractors. While many workers and firms are on temporary support through public sector subsidy of wages or quasi-partial nationalisations, a proportion of those positions or organisations being kept alive will die as soon as support is removed. There are many zombies already.
Similarly, there will be a lot of bad debt on company books (and thereby in banks) that will be realised in market revaluations over coming periods. These collapses will release resources for subsequent entrepreneurial reconstitution and reinvention.
But we should also expect consolidation of existing markets and resources among surviving players. This may actually result in higher growth and profits among large adaptive companies — particularly technology driven companies. So a period of global economic destruction is not inconsistent with a booming share market.
5 — The twilight of conventional macroeconomic policy
At the same time, COVID-19 looks to fundamentally break the standard monetary and fiscal policy levers that have been used to manage business cycles over the twentieth century.
From a public finance perspective, the magnitude of the committed policy actions is already unprecedented. The levels of public debt that are planned in order to deal with this crisis — the policies to subsidise wages, provide rent and income relief, bail out companies, etc in order to avoid market catastrophe — are the largest that has ever been experienced. Moreover, these actions are being taken during a massive collapse in tax receipts. The implications for public finance are catastrophic, with a huge increase in public debt, a vastly worse central bank balance sheet, and looming inflation.
The result is a policy challenge that far exceeds capabilities of traditional monetary and fiscal levers. We will require institutional policy reforms to deal with the crisis. But institutional policy designed to free-up the supply side of the economy, to lower the costs and constraints on businesses, is politically much harder to achieve.
Indeed, the limits of these policy levers reveals the extent to which government administration (e.g. of money, of asset and property registries, of identity, of regulation and governance) is still the foundation of a modern economy. The pandemic has brought into sharp relief the limits and constraints of this centralised public infrastructure and the technocratic foundations of the macroeconomic policy mechanisms built upon them.
The real alternative to conventional policy levers isn’t different policies (like quantitative easing, negative interest rates, or universal basic income) but better institutional technologies. We’ve been looking in the past few years at distributed digital technology (that is, blockchain) that offers a new administrative and governance base layer of the economy (see here, here, here, here and here to start).
A digital infrastructure base layer of industry utilities and digital platforms would provide a far more agile foundation for targeted economic policy and entrepreneurial adaptation.
6 — A new global trading order
One of the most powerful institutional forces over the past several centuries, and which has underpinned global economic prosperity in the industrial era, was the development of global trading infrastructure for commodities and capital. It was built around the Westphalian system of nation-state record-keeping and intra-nation state treaty-based institutional governance (i.e. trade zones). But it has come to a virtual halt in the crisis.
In the short and medium term the global trading order will rebuild around a different order, namely provable health identity and data to facilitate the safe movement and interaction of people. Where that can safely happen, so can economic activity. Health zones can become the basis for trade zones. Australia and New Zealand are already talking about a “health bubble”. It would be easy to include other highly successful health economies — Taiwan, Japan, Germany, potentially Hong Kong and Singapore, some Pacific Island nations.
Green zones (or cordon sanitaire) have long been used in pandemics and have once again been proposed as a way to exit lockdown. As the health zone grows, so can the trade zone. Economic zones can then free ride on the decentralised identity and data infrastructure created to build a health zone. The result will be the redrawing of physical and network boundaries, even eliminating artificial economic borders, to create integrated trade zones.
7 — A new political order
The costs of COVID-19 do not fall evenly across the population. The health risks fall heavily on some groups (the elderly and those with co-morbidities), and the costs of economic lockdown fall on different groups and will be felt differently. The differential impact by sector, jobs, education, human capital investments or physical or financial capital write-downs shape how the costs are distributed across society.
The virus imposes huge private costs that will be in part socialised through political bargaining. The outcome of these politically mediated bargains and transfers that will shape politics for years to come.
But the pandemic also shifts some of the anchor points of political economy. The sudden growth of the welfare state, of unemployment insurance and wage-support, of healthcare provision and childcare, even of social housing are unlikely to be easily rolled back. So there will be a higher demand for social welfare safety nets.
But to pay for this, along with the urgent need to address the huge deterioration of public balance sheets, economic policy will need an aggressive pro-market agenda to unleash economic growth. Politically, this is a pivot to the centre with very ‘dry’ economic policy and ‘wet’ social policy — what was called ‘third way’ in the 1990s.
The counterpoint to that centre-pivot is that many of the high-cost political projects of both the right and the left will be abandoned. Reduced economic growth means we can afford fewer of the luxuries of advanced capitalism.
This is a vision of a new kind of social-digital capitalism to be built after the reset — from the government-led physical infrastructure of the industrial era, to a digital era built on private, open and communally developed technology platforms.
The economic consequences of the COVID-19 pandemic are mostly currently being discussed as a macro policy response to dealing with the economic destruction that the public health strategy necessitates. This is talk of the V-shaped, U-shaped, L-shaped or W-shaped recoveries. In Unfreeze we wrote of the need for a square root shaped recovery — after the reopening, we’ll need a long period of high economic growth to return to the prosperity of 2019.
But here we’ve gone further. COVID-19 is driving structural evolutionary change in the economy. The accelerated adoption of digital economic infrastructure during the crisis will leave a lasting mark on the political and economic system of the future.
Darcy WE Allen, Chris Berg, Sinclair Davidson, Aaron M Lane, and Jason Potts are with the RMIT Blockchain Innovation Hub.