The pandemic has also opened up a plethora of new insights which were earlier quite difficult to study. This has been possible primarily because of the massive disruption brought about by the pandemic. The sudden and relatively widespread disruption has actually created a large natural experiment.
The economic consequences of the Covid-19 pandemic have become an area of intense research and scrutiny in the last few months. Economists, mathematicians and statisticians are focusing on the impact of lockdowns, healthcare costs and vaccine development programmes on businesses, employment, household savings and growth. Yet what is also becoming evident is that the pandemic is providing a remarkable opportunity to re-imagine and restructure the discipline of economics itself. It is also providing a window to let out some of the most strongly held orthodoxies in the subject and usher in relatively nascent fields that till now have not been able to have a strong footing.
Consider, for instance, the field of behavioural economics. No doubt that there has been a large body of work in the last one decade and a couple of Nobel Prizes won. Yet, the ‘Homo economicus’ assumption of a perfectly rational human being taking decisions with mathematical precision continues to be the dominant precept in most of modern economics, at least up to the graduation level. It is only at the master’s level that some introduction to behavioural economics is provided.
However, the pandemic has shown to a large extent how the various tenets of behavioural economics have become useful in explaining people’s behaviour and nudging them in the right direction. For example, an important principle is that of the ‘present biases’. Humans have a trend of overvaluing immediate rewards, while putting less worth in long-term consequences. This explains, to a large extent, why people have been careless in wearing masks and maintaining physical distancing. The rewards of not doing so are immediate – to be able to interact freely with others – but the future costs are uncertain with the possibility of getting infected with Covid-19.
Another well-known principle in behavioural economics is ‘nudge’, which involves people to conform to positive social behaviour through non-coercive reinforcing positive stimuli. A recent study from India found that the installation of low cost soap dispensers in homes improved hand washing in rural households. The soap dispensers acted as positive stimuli that nudged the people towards hand washing. Finally, ‘framing effect’ is a phenomenon where people decide on options based on whether the options are presented with positive or negative connotations. In the case of Covid-19, it has been found that positive messaging in the form of, say, ‘wearing masks helps to reduce chances of Covid spread by X%’ had a greater positive effect on wearing masks as compared to a negative messaging in the form of say, ‘not wearing masks increases your chances of getting Covid by Y%’.
While these studies and approaches are not new, yet more researchers are now focusing on these areas and viewing the world through the prism of behavioural economics. This has opened up the possibility of greater research and analysis into the field, and through it, greater acceptance.
The pandemic has also opened up a plethora of new insights which were earlier quite difficult to study. This has been possible primarily because of the massive disruption brought about by the pandemic. The sudden and relatively widespread disruption has actually created a large natural experiment. This has provided an opportunity to test relatively interesting aspects of consumer, firm and market behaviour. Take, for instance, the phenomenon of Amazon Effect, first discussed in the Jackson Hole Symposium in 2018. There is evidence to suggest that e-commerce giants such as Amazon are actually affecting the overall price level in the economy. As the prices by these firms are generated on a real-time basis through AI-based learning algorithms, prices are becoming much less rigid and affecting overall inflation rates. With the lockdown imposed and these e-commerce giants making a bang for the buck, it has become much easier to study these effects. In fact, at the recently held IMF’s Statistical Forum, an Online Price Index was introduced for discussion. This has been used to study the behaviour of prices in the cyberspace. Unlike the traditional consumer or whole price indices, this Index is based on real-time data and is more responsive to minute price changes.
Another interesting study has looked into how people’s faith in science and experts has changed after exposure to the pandemic. While there was growing anecdotal evidence about people losing faith in science and experts in the last few years, the pandemic has provided a distinct environment to test this hypothesis. The results seem to suggest that people’s faith in science is increasing. At the same time, more people are now accepting the government’s role in the economy and in rebuilding people’s lives. This is in stark contrast to the neo-liberal economic doctrine which has formed the bedrock of major policymaking in most economies of the world in the last few decades. Thus, the pandemic has once again ushered in a clamour for greater government intervention within the economics discipline – something that was on the wane in the last few decades.
Finally, the economists are scrambling for better data sets. With the pandemic and its associated lockdown, it has become almost impossible to gather good data points. At the same time, it is well accepted that evidence-based policymaking using good data systems is the sine qua non for dealing with a crisis of this magnitude. The recently concluded International Monetary Fund’s 8th Statistical Forum discussed such innovative methods to obtain reliable data sets that pose minimal exposure to the enumerator and are not easily disrupted by lockdowns. The Online Price Index discussed above is one such example.
The examples cited above are just a handful of all the churning that is going on inside the discipline of economics. From contestations and debates around fundamental doctrines and schools of thought to the quest for greater insights into household and market behaviour through the use of innovative data tools and systems, economists are finding this pandemic as an opportunity to reorient the subject to the needs of the time.