Walter Molano | Economic theory and the science of contagion
Published:Friday | October 2, 2020 | 12:17 AM
As the days shorten and temperatures dip, an air of pessimism is starting to spread.
COVID infections are on the rise in Europe, and governments are starting to clamp down. The United States presidential elections are just a few weeks away, but people are gearing up for an ugly fight. The high level of mailed-in ballots means the results will not be known for some time. Moreover, the results will most likely be contested by the losing side and the outcome may be decided by the Supreme Court.
On top of that, the drama that is unfolding due to the recent death of Supreme Court Justice Ruth Bader Ginsburg and the rush to fill her seat is only flaming the fires of political discord.
Last of all, recent statements by US Federal Reserve Chairman Jay Powell and a bevy of data releases suggest that the economic recovery will be slower and longer than expected. However, a look at the science and economic theory suggests something different.
One of the aspects of the recent outbreaks of COVID-19 is that the symptoms are milder and the death rates are lower. That is exactly what scientific theory predicts would happen.
There is an inverse relationship between lethality and contagion. The more lethal a contagious disease, the less contagious it is. In actuality, that is not entirely true. What happens with a highly lethal contagious disease is that it kills the host before it can spread to another host. Ebola, which broke out in 2014, was extremely lethal, with a lethality rate of about 50 per cent. Yet, it was quickly brought under control.
It is true that health organisations and governments mobilised resources quickly to address the pandemic. The outbreak was concentrated in rural areas of Africa, with little contact with the wider world. However, the sad reality was that most patients would be stricken suddenly and die before passing it on to anyone else. Moreover, the disease is constantly mutating.
Given that the virus is a string of ribonucleic acid, or RNA, that hijacks cells and uses its own deoxyribonucleic acid, or DNA, mechanisms to produce new viruses, it constantly picks up bits and pieces of the hosts’ genetic code. However, the mathematics of contagion shows that the least lethal variants are the ones that are going to survive, while the more deadly ones will disappear along with their hosts.
That is exactly what is happening with COVID-19. The first strains in Europe and the United States were much more deadly. At one point in time, the lethality rate in New York City was 10 per cent. Yet, the lethality rate has been dropping. Part of this phenomenon is due to improvements in treatment.
Health officials have mobilised staff and equipment. Better treatment procedures and more effective medications have been deployed. Yet, the other fact is that the stronger versions of the disease are being diluted and replaced by milder versions. Today’s influenza is a distant relative of the deadly Spanish Flu that wreaked havoc more than a century ago.
Eventually, COVID-19 will become one of the staples of infectious diseases that come and go. Of course, the introduction of a vaccine will only make matters better. Nevertheless, it is important to realise that the mechanics of contagion paint a better outlook.
The same goes with economic activity. There is a gaggle of pundits who are painting a picture of economic chaos for years to come. They are claiming that the global economy will never be the same. They are bemoaning the death of major cities, such as New York, London and Hong Kong. Moreover, they are saying work and education will change permanently.
Nevertheless, economic theory disagrees completely with such dismal Ballardian predictions.
In 1776, the Scottish physician Adam Smith argued that economic activity was the product of land, labour and capital. Through the centuries, economists have shown that the various ways that these three factors are combined result in a production function, which can be akin to a recipe that leads to differences in the level of activity.
In contrast to other pandemics, such as the Black Death, which wiped out a large swathe of the population, COVID-19 has not had a major impact on any of the factors of production.
Therefore, as the disease dissipates, either to its own dynamics or the introduction of a vaccine, the factors of production will be deployed according to the production function that was already in place. Furthermore, pent-up demand, due to the natural depreciation of the capital stock, will ramp up the need for greater output, thus leading to a more vigorous and sustained economic recovery.
The sudden gloom that is infecting the airways may be more related to seasonal changes and the foreboding anticipation of the upcoming elections, but it has little to do with the science of contagion and the tenets of economic theory.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.