June 2, 2020

How Can Economics Enable Us to Better Understand COVID-19?

Richard Wagner

Distinguished Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics
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Read the original article at The Vienna Circle.

What can economic theory contribute to our understanding of the COVID-19 pandemic? Upon being asked this question, most people would doubtlessly give answers ranging between little and nothing. These answers would reflect the intuition that COVID-19 mostly presents problems for public health, for which knowledge of epidemiology and related medical fields would be of far greater relevance than knowledge of economics. Sure, one can recognize that COVID-19 requires budgetary appropriations and entails regulatory impositions; while these are necessary to deal with the pandemic, they are secondary to public health all the same. This type of response would surely describe most people’s intuitions. And there is no doubt that intuitions are often good guides to follow, as the idea of emotional intelligence suggests.[1] All the same, intuition can sometimes be misleading, even severely so.

No intuition is more obvious than the assertion that the sun moves across the sky from east to west. To this day this description remains part of our daily language, even though it has been known to be wrong since Nicolaus Copernicus, in the 14th century, placed the Sun and not Earth at the center of our solar system. Intuitions and first impressions are often hard to overcome even when they are wrong, as popular presumptions about public health and COVID-19 may illustrate. In this essay, I explain why economics is of more relevance to COVID-19 than is commonly recognized. I say this not to denigrate the significance of epidemiology to concerns of public health but only to explain why the relevance of economics to COVID-19 is significantly underappreciated.

In what ways is economics relevant for public health?

It is easy enough to recognize that public health programs must be financed and that those programs will sometimes require political regulation of private activity. These recognitions by themselves do not propel economics into the foreground of discussions regarding COVID-19. It is important at this point to recognize that economics pertains to what are nearly two distinct fields of study that carry the same name. In this, economics resembles the two parabolas X2 and -X2, which share a common origin but point in opposing directions. Those different directions illustrate the distinction Peter Boettke makes between the mainstream and the mainline of economic theory.[2] Their common origin is the presumption that people seek to be effective in whatever actions they choose to undertake. After all, who has ever heard of someone setting out to fail at what he or she tries to do? Failure is probably a part of nearly everyone’s experiences in life, but such failures are not part of our intentions.

Beyond their common origin, the two visions of economics entail two distinct analytical frameworks which address different questions, both of which have social value but which point in different analytical directions all the same. What Boettke describes as the mainstream of economics took shape in the late 19th century with the advent of what is called neoclassical economics, and emphasizes that all actions entail tradeoffs among values that people hold rather than there being some universal value, such as health, that trumps all other values. That mainstream recognizes that people value health, while also recognizing that people value more than health and, moreover, are often willing to trade some of one value for some of another.

What Boettke describes as mainline economics took shape in the 18th century with Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations and is a broad line of scholarly inquiry into some of the core questions of relevance to all societies.[3] Nathan Rosenberg, for instance, explains that Adam Smith was concerned with topics of general social interest, and most certainly was not some narrowly materialistic and hedonistic thinker.[4] Where mainstream economists focus on describing tradeoffs and finding efficient patterns of resource allocation, the mainline economists who came after Smith were principally concerned with the societal properties of the institutional and organizational arrangements that governed relationships among the members of society. In Smith’s time, the relevant issues of governance concerned the societal properties of the systems of mercantilism, physiocracy, and liberalism. Today, they concern the complex set of relationships among political and private entities.

Economies and societies as complex rather than simple objects

Clear thinking about the contribution of economics to our understanding of public health and COVID-19 requires recognition that societies are such complex objects that no person or office has the knowledge necessary even to describe them completely, let alone understand the network of causal patterns that they operate within. This complexity means that we necessarily must work with models of society that are simpler than the reality inside of which we live, as Mary Morgan explains luminously in her treatment of the history of economics.[5] There is nothing wrong with this situation. It can be no other way for any field whose complexity renders impossible direct observation of all the causal forces and processes that impinge on the situations that interest us. In the face of such complexity intuition can sometimes be severely wrong, as it was wrong with respect to the sun moving across the horizon. Simple intuition seems to support the presumption that any question has an answer that can be discovered by the appropriate application of expert-guided thought: ordinary people might not be able to answer that question, but experts can, if given enough support and time. This intuition, however, is often wrong. Complexity can be of such a high degree that it is impossible even to decide among possible answers to asked questions through truly rational calculation.[6]

The theory of rational choice requires a decision maker to follow a three-stage template: (1) list the possible options; (2) evaluate those options; and (3) choose the highest valued option. This template is often impossible to follow in real life. For instance, there are nearly 312 million sequences by which five cards can be drawn from a 52-card deck. Public policy entails selecting some subset of actions from among a larger set of possible actions. Suppose five options must be sequenced from among 52 possible options. Further suppose the evaluation of an option requires one hour of analytical effort. A dedicated staff of 1,000 analysts each working 60 hours per week will require just short of 100 years to determine the highest valued option. Obviously, this will not happen. Actions will be taken well before rational evaluation can be conducted because time is too scarce to allow for rational evaluation. Action necessarily will proceed largely on intuitive and not on rational grounds. But whose intuitions will be dominant and whose will be dismissed? That some intuitions will dominate over others is dictated by the situation, which means in turn that some tradeoffs will be highlighted while others ignored.

Rational action: political vs. commercial environments

The combinatorial character of many choices means that truly rational action is often impossible and must give way to efforts to muddle through situations, which has been described by such terms as satisficing[7] and incrementalism.[8] Justification for action is commonly advanced using the language of rational action all the same, for use of such language deflects attention away from the arbitrariness of decision making in settings where truly rational calculations are impossible.

“The Value of Rationally Reconstructing Buchanan’s Work” with Richard Wagner and Jayme Lemke

Modern societies operate within a complex division of labor throughout the world. The degree of that complexity is so high that it is impossible for someone even to write down in proper sequence all the steps that have to be taken to produce a pencil.[9] Sure, one can easily buy pencils, but the point of that illustration is to show that it is the system which we live inside more than our own intelligence to which we owe our standard of living. Individually, we would each live a meager existence. Through the division of labor, however, we multiply many times over our standard of living. The prime lesson of economics through the centuries has been the potential for local actions connected through market-friendly institutions to exponentially increase our ability to gain from each other’s activities.

It is a significant though intuitively understandable mistake to treat the taking of political and regulatory action as indistinguishable from the taking of action by private persons and businesses. This mistake is a form of what philosophers call a category mistake, which is to assign properties to an object that it cannot possibly have. Action taken by an individual is categorically different from action taken by a group, as the Italian economist and sociologist Vilfredo Pareto noted in distinguishing between logical and nonlogical action.[10] Rationality is a property that individuals but not groups possess. Individuals bear the value consequences of their actions; groups of individuals do so only under special conditions where unanimity is required for action. For such private groups as clubs and churches, the value consequences of actions are confined to members of the group. It is different with political action, especially within larger political entities where small cliques can often dominate large masses.[11]

Recognition that policy actions do not correspond to the requirements for rational action provides a second reason why the rational-choice model does not apply directly to COVID-19. The commonplace assertion that “incentives matter” is always in play, both for individuals and for collections of individuals. For groups, however, so-called experts achieve prominence they do not have with respect to individuals. Reason is always present, but so are intuitive beliefs and personal dispositions. For instance, Medicare gives a 20 percent bonus to hospitals for Medicare patients admitted with COVID-19, which has been justified as being an administrative charge to defray some of the excess expenses associated with treating COVID-19. Since diagnosis is costly, it is reasonable to expect hospitals to economize on their expenses of diagnosis. In these circumstances, there is surely a reasonable basis for anticipating that the number of Medicare COVID-19 patients will be larger than it would have been without that bonus payment, let alone if COVID-19 diagnoses negatively impacted Medicare reimbursements.

Mainline economics is fundamentally concerned with the properties of different institutional arrangements within which people govern their interactions with one another and through which particular allocations of resources emerge.[12] All societies unavoidably will confront questions regarding what will be produced, how that production will be organized, and how much of the output different people will receive. The fundamental lesson of economics is that the frameworks through which societies address these questions matter a great deal for the quality of life of the people living inside those societies. Economics necessarily labors under the difficulty that no one can truly apprehend the entirety of an economy. Hence, our only option is to develop models that we think give good fits with the reality we seek to address. It is, of course, the same with epidemiology.


What is the impact of COVID-19 on our common lives? And does COVID-19 truly impact our lives commonly and uniformly, or might its impact differ significantly among categories of people? And if the latter, where is decision authority better located: with the people directly affected or with distant political authorities? These are questions that pertain to data of some type. Economists often use data drawn from a national population, as illustrated by observations on rates of unemployment or economic growth. That type of data can also be divided into smaller chunks, as illustrated by data collected by state or county. Understandably, federal agencies and policies will emphasize national data while state officials refer to data that pertain to their states. Even these data treat everyone within the relevant entity as being impacted equally by COVID-19. To be sure, most people who work with such data recognize that it can be collected and reported in different ways.

A problem that is generally ignored and of potentially great significance all the same is that data are not just there to be observed but rather are the creations of some data-generating process.[13] How many deaths are there from COVID-19? These numbers are reported continually as if they are totally objective reports, similar to comparing the heights of Mt. Everest and Pike’s Peak. To say that the death rate from COVID-19 is 10 per 100,000 or that the deaths from COVID-19 is three times higher in New York than in New Jersey appears to be objective but actually entails a good deal of subjectivity.

Data on deaths are compiled from the death certificates that attending physicians file. While there is no good reason to think that physicians intentionally report deaths inaccurately, it is also necessary to recognize that physicians are often beleaguered in their work and, moreover, that judgments about causes of death can be difficult and costly to make. When death certificates are checked through subsequent autopsy, the causes of death frequently are found to have been misclassified. How significant this might be for COVID-19 must await study. So far, there have been news articles pointing to both the potential over- and under-estimation of deaths from COVID-19.[14] Many studies have been done for lung cancer, the general result is an overestimation of lung cancer deaths because many deaths that were attributed to lung cancer on death certificates were shown by autopsy to have been metastases from other sites in the body.[15] To report that the prevalence of COVID-19 is the product of some data-generating process and not the result of direct observation is to bring into the analytical foreground the properties of different processes for generating data.

As discussed so far, policymakers lack the knowledge necessary to make truly rational decisions and do not bear the value consequences of their actions, which surely biases subsequent actions.[16] Such biases are probably unavoidable, though they can be mitigated. Indeed, such mitigation is a prime feature of federal systems of government. In the absence of a decidable rational answer, there is much value in living with different social experiments that help to generate information that would not exist with a uniform standard throughout the nation. In this respect, Michael Polanyi and Vincent Ostrom explain the general superiority of polycentric over monocentric or centralized political organization.[17] This form of experimental polity was present at the American constitutional founding, but over the past century or so that constitution has been turned upside-down, with more decisions being made from a centralized, top-down approach.[18]

“Public Governance and the Classical-Liberal Perspective” Book Panel

In the presence of modern societal complexity, which the COVID-19 pandemic illustrates, we must find a way to enable experimentation to flourish rather than suffocating those experiments through embracing the pretense that the right set of political authorities possess the one best approach.[19] To be sure, any such statement of ideal must also wrestle with the current reality we confront with our presently upside-down constitution.

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More Commentary on the COVID-19 Pandemic:

Author:

Richard E. Wagner is the Hobart R. Harris Professor of Economics at George Mason University and a Distinguished Senior Fellow with the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.

Notes:

[1] For two references, see Daniel Goleman, Working with Emotional Intelligence. New York: Bantam Books, 1998; and Martha C Nussbaum, Upheavals of Thought: The Intelligence of Emotions. Cambridge: Cambridge University Press, 2001.

[2] Peter J. Boettke, Living Economics. Oakland, CA: Independent Institute, 2012.

[3] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Indianapolis, IN: Liberty Fund, Inc., 1982 [1776]).

[4] Nathan Rosenberg, Some Institutional Aspects of the Wealth of Nations. Journal of Political Economy 68 (1960): 557–70.

[5] See Mary Morgan, The World in the Model. Cambridge: Cambridge University Press, 2012.

[6] A contemporary statement of this theme is Gregory Chaitin, Newton da Costa, and Francisco Antonio Doria, Gödel’s Way: Exploits into an Undecidable World, London: Taylor & Francis, 2012. For an earlier treatment of related territory, see Douglas R. Hofstadter, Gödel, Escher, Bach: An Eternal Golden Braid. New York: Basic Books, 1979. Also relevant on this theme is Robert M. Pirsig’s Zen and the Art of Motorcycle Maintenance: An Inquiry into Values, New York: William Morrow, 1974.

[7] Herbert A. Simon, Rational Choice and the Structure of the Environment, Psychological Review 63 (1956): 129–38.

[8] Charles E. Lindblom, Still Muddling, Net Yet Through. Public Administration Review 39 (1979): 517–26.

[9] Leonard Read, I, Pencil. Irvington-on-Hudson, NY: Foundation for Economic Education, 1946.

[10] Vilfredo Pareto, The Mind and Society: A Treatise on General Sociology. New York: Harcourt Brace, 1935 [original ed. 1915]. For recent examinations of Pareto, see Meg Patrick and Richard E. Wagner, From Mixed Economy to Entangled Political Economy: A Paretian Social-theoretic Orientation. Public Choice 164 (2015): 103–16; and Rosolino Candela and Richard E. Wagner, Vilfredo Pareto’s Theory of Action: An Alternative to Behavioral Economics. Il pensiero economico italiano 24 (2016): 15–29.

[11] An incisive examination of this feature of collective action is Charles R. Plott and Michael E. Levine, A model of agenda influence on committee decisions, American Economic Review 68 (1978): 146–60. This theme is amplified in Michael C. Munger and Kevin M. Munger, Choosing in Groups, Cambridge: Cambridge University Press, 2015. It should be noted that the study by Plott and Levine pertains to decision making within a large club; Munger and Munger deal with political entities.

[12] See Richard E. Wagner, Macroeconomics as Systems Theory: Transcending the Micro-Macro Dichotomy, London: Palgrave Macmillan, 2020.

[13] Recognition of this theme goes back to Oskar Morgenstern, The Accuracy of Economic Observations. Princeton, NJ: Princeton University Press, 1962.

[14] See, for instance, British Medical Journal, “COVID-19 death counts ‘substantial underestimation’ of actual deaths for some Italian regions,” Medical Press, May 14, 2020, https://medicalxpress.com/news/2020-05-covid-death-substantial-underestimation-actual.html; Amanda D’Ambrosio, “’Probable’ COVID-19 Death Reporting by State,” Medpage Today, April 23, 2020, https://www.medpagetoday.com/infectiousdisease/covid19/86127.

[15] See, for instance, the autopsy study reported by G. Kendrey, et. al. Misdiagnosis of Lung Cancer in a 2000 Consecutive Autopsy Study in Budapest. General and Diagnostic Pathology 142 (no. 3–4, 1995): 169–78.

[16] Bertrand de Jouvenel illustrates this point pithily in The Chairman’s Problem, American Political Science Review 55 (1961): 368–72. Jouvenel explains how the scarcity of time operates to give oligarchic properties to large-scale democratic processes. For an examination of the limits on economic knowledge, see Stephen J. DeCanio, Limits of Economic and Social Knowledge, London: Palgrave Macmillan, 2014.

[17] Michael Polanyi, The Logic of Liberty, London: Routledge & Kegan Paul, 1951. Vincent Ostrom, The Political Theory of a Compound Republic, 2nd ed. Lincoln: University of Nebraska Press, 1987.

[18] Michael S. Greve, The Upside-Down Constitution. Cambridge, MA: Harvard University Press, 2012.

[19] This problem was recognized crisply in Friedrich A. Hayek, “The Use of Knowledge in Society, American Economic Review 35 (1945): 519–30. Also, of direct relevance is Frank H. Knight, Intelligence and Democratic Action. Cambridge, MA: Harvard University Press, 1960.