The pandemic begins in Asia, rips through the capital cities of Europe and wipes out at least a third of all human beings in its way. When it is all over, revolts begin, cherished institutions fall, and the entire economic system has to be reconfigured.
That is a short history of the Black Death, a bubonic plague pandemic caused by the bacterium, Yersinia pestis, which spread from Mongolia to Western Europe in the 1340s.
Because the economy then was based on local agriculture and crafts, ordinary life bounced back relatively quickly.
But, by radically reducing the number of workers, it gave the survivors increased bargaining power, which soon translated into new concepts of liberty among the population of medieval cities.
That, in turn, started a process of economic change that brought an end to the feudal system and, some argue, triggered the rise of capitalism.
Capitalism’s plague nightmare
Today, capitalism faces its own plague nightmare. Though the COVID-19 virus may kill between 1 percent and 4 percent of those who catch it, it is about to have an impact on a much more complex economy than the one that existed back in the 1340s – one with a much more fragile geopolitical order, and on a society already gripped with foreboding over climate change.
Let us consider the massive changes the pandemic has already forced.
First, the partial shutdown of daily life in large parts of China, India, most of Europe and numerous states in America.
Second, significant damage to the reputations of governments and political elites who either denied the seriousness of the crisis, or in the initial stages proved incapable of mobilising their healthcare systems to meet it.
Third, an immediate slump in consumer spending across all major economies which is certain to provoke the deepest recession in living memory: share prices have already collapsed and this, in turn, hurts middle-class families whose pension funds have to invest in shares. Meanwhile, the solvency of airlines, airports and hotel chains is in doubt.
In response, states have launched economic rescue packages so massive that most people have not yet got their heads around the implications. The US government will inject two trillion dollars into the economy – through a mixture of direct payments to citizens and loans to business – more than half of what it collects in taxes in a year.
Meanwhile, the central banks have switched to a new and aggressive form of quantitative easing. Just as after the last global financial crisis in 2008, they will create new money to buy up government debt – but this time, it is not going to be gradual, or focused on the safest government bonds. Introduced as a panic measure in 2008, it seems quantitative easing could be with us for decades.
Politicians are busy reassuring voters that it will be a “V-shaped recession” – a sharp slump followed by a bounce-back, because the “real economy”, they claim, is sound.
To understand why that is over-optimistic, let us use the metaphor of a building.
In the 2008 financial crisis, it looked like the “roof” – the finance system – had collapsed onto the main structure which, though it was damaged, stood firm and we eventually rebuilt the roof.
This time, by contrast, it is the foundations that are collapsing – because all economic life in a capitalist system is based on compelling people to go to work and spend their wages.
Since we now have to compel them to stay away from work, and from all the places they usually spend their hard-earned salaries, it does not matter how strong the building itself is.
In fact, the building is not that strong. Much of the growth we have experienced during the 12 years since the last financial crisis has been fuelled by central banks printing money, governments bailing out the banking system and debt.
Instead of paying down debt, we amassed an estimated $72 trillion more of it.
Unlike the time of the bubonic plague, 21st-century trade and finance systems are complex – which, as we learned in 2008, means they are fragile.
Many of the assets circulating in the finance system are – just as in the run-up to the 2008 crisis – complicated bundles of IOUs issued by banks, insurance groups and other financial companies. Their value lies in the fact that they give the holder a claim on future income.
Our gym memberships, our student loan repayments, our rents, our car repayments this year, next year and beyond are already counted as “paid”, with people in the finance system taking sophisticated bets on how much they are worth.
But what happens when we do not go to the gym, do not buy a new car? Some of those IOUs become worthless and the financial system has to be bailed out by the state.
The unthinkable is here
Even though most ordinary people do not understand how dangerous this is, the people in power do. That is why they have persuaded the central banks to effectively nationalise the bond markets.
This means that states are issuing debts to bail out people and companies – as with Trump’s two-trillion-dollar deal – and those debts are being swallowed up by another part of the state itself – the central bank.
Left-wing economists, myself included, have been warning that, in the long term, stagnant growth and high debt were likely to lead to these three policies: States paying citizens a universal income as automation makes well-paid work precarious and scarce; central banks lending directly to the state to keep it afloat; and large-scale public ownership of major corporations to maintain vital services that cannot be run at a profit.
On the rare occasions that such suggestions have ever been put to investors in the past, the response was usually a polite head-shake or, among people who witnessed the collapse of Soviet communism, outrage. It would kill capitalism, they said.
But now, the unthinkable is here – all of it: Universal payments, state bailouts and the funding of state debts by central banks have all been adopted at a speed that has shocked even the usual advocates of these measures.
The question is, are we going to do this enthusiastically, and with a clear vision of the society that emerges on the other side, or reluctantly, with the intent to revive the system that has just broken down?
Let us understand why economists have been so hostile to these crisis measures up to now.
With universal income payments, British conservative politician Iain Duncan Smith pointed out, the problem is they might “discourage people from going to work“.
When it comes to state ownership and attempts to plan production (for example, the current scramble for ventilators), free-market economists believe such attempts at human control get in the way of the market, which, in their opinion, functions as an intelligent machine, bringing order to the world in a way no planning agency or government can ever do.
As for the funding of state debts by central banks, this is seen as an admission of moral defeat by capitalism: It is entrepreneurship and competition that are supposed to drive growth, not the Bank of England or the Fed printing money and lending it to their treasuries. Therefore, a capitalism permanently reliant on these mechanisms is unthinkable to most traditional economists.