The year 2020 will be marked as eventful in history. The surprising onset of a tiny virus caused a global pandemic; a bear emerged in the stock market. Future generations will ponder those numbers and figures logged in Wikipedia as we are absorbed by them today.
Naturally there has been much talking of a recession. Will the post-pandemic recovery be U- or V-shaped? Could we get into another Great Depression? Following a Keynesian approach, governments poured out money with an unprecedented magnitude quickly to save the economy. The effectiveness of these gigantic rescue efforts remains to be seen; their impacts will manifest in coming months and years.
Meanwhile, the Coronavirus crisis provides an opportunity to re-examine the fundamental mechanisms of recessions and depressions. There are different theories, but economists still don’t agree on the causes of recessions and depressions. While Keynes was right about the effect of demand and that government interventions are necessary to boost demand for restarting a depressed economy, Schumpeter saw deeper and more clearly about long-term economic transitions resulting from technological change.
Reduced demand is not the cause but a symptom of recessions; government spending is therefore a symptom-based cure to recession. A more fundamental approach to mitigate the potential impacts of recessions in the long run is yet needed. It is like an ER doctor, who after saving a patient’s life with a defibrillator or a ventilator or whatever medicines, would always tell the patient to go home and practice a healthy lifestyle so to improve the immune system for the long run.
And in medicine many symptom-based cures have proved to be harmful because the mechanism turned out to be the opposite of what was observed on the surface. Medications that suppress stomach acid production for acid reflux are an example. On the other hand, new gene-based cancer treatments often produce complications because gene interactions are complex, and scientists don’t fully understand them yet.
A correct diagnosis of fundamental mechanisms is thus in order for both short- and long-term prescriptions. It is helpful even if we just try to get a sense of how bad this recession will be.
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Amid the Coronavirus crisis, I dug out some writing I did six years ago and read Schumpeter’s Business Cycles and Creative Destruction. I was glad to find support from his work and revised my old piece.
