Social distancing, lockdowns, all the essential public health responses to the coronavirus pandemic, also impact one of the foundation stones of economic prosperity: the division of labour. This implies that the economic and social shock being caused by the measures to halt or slow the spread of the disease could well be severe.
Unfortunately, this reality has led to a polarised debate when there is no choice about the immediate policy response. It is unwise to suggest governments can think about trading off a higher death rate from the virus for a lesser impact on the economy. There is simply no way out of the immediate economic hit. But it is essential to be aware of why the pandemic will be particularly damaging to living standards, and to ensure these lessons inform future policy choices, including health policies.
It was Adam Smith’s great insight – illustrated by his famous example of the pin factory where one person draws out the wire, another cuts it and so on – that productivity is the result of dividing production into smaller tasks. Individuals or firms can produce much more if they specialise, and trade their increased output and income for other goods.
Economic growth since his publication of The Wealth of Nations in 1776 has been driven by ever-greater degrees of specialisation. The invention of the assembly line spread specialisation throughout industry. Globalisation since the 1980s has turned almost the whole world into a distributed factory. Modern urban life has made each of us dependent, daily, on a vast cross-border web of transactions and exchanges.
Over the course of recent decades more of these have become intangible, relying on digital communication, including electronic payments. This is why so many people can work from home in the current crisis. But many transactions are still tangible (buying food, or machine tools) or person-to-person (going to school, having a haircut).
The long list of categories regarded by the UK Government as ‘key workers’ is testament to how reliant we are on each other, even within one country. It includes health and social care workers, other essential public services (police, fire, prison and probation staff, undertakers, public service broadcasters), some government administrators - both local and national, everyone involved in food production, processing, distribution and sale, pharmacies, and vets, transport staff, utilities, banks, IT and data infrastructure, chemicals, civil nuclear power, post, waste disposal – and the teachers and nursery staff to care for the children of these workers. This list adds up to roughly a third of the total employed workforce.
The economist Paul Seabright captured our mutual interdependence in the title of his book The Company of Strangers. He described the vast extended network of connections between all of us in today’s economy as ‘the Great Experiment.’ Now, in the face of coronavirus, this experiment is turning critical.
Already there are signs of plunging economic activity in many countries, not just in areas such as entertainment and restaurants, but also manufacturing. This means jobs are being lost, incomes falling, and perhaps some people may even lose their homes. The extended supply chains operate throughout manufacturing and retailing, including the supply of food to supermarkets. We should all be bracing ourselves for shortages of some of our favourites.
Above all, an economic downturn leading to sustained loss of income means people’s mental and physical health will deteriorate. People can be tipped into a lasting downward spiral because income improves health but good health in turn affects people’s earning capacity. Rising life expectancy is strongly correlated with growth in incomes, and hence GDP (although the GDP link has broken for some groups in the US population in recent years, as Anne Case and Angus Deaton have shown). There is an unavoidable judgment involved in taking action to save lives now, about the long term implications for loss of health and life in future.
And for young people entering the job market this year, doing so in an economic recession or depression will affect their earning capacity – and health and well-being – from then on1. Others at an earlier stage are experiencing disruption to their learning and assessments.
There is no menu of short-term options; but there are choices about what kind of future path to take. All these potentially scarring effects on the lives of millions make the hunt for quick tests to assess the presence of covid19 and the potential for immunity so urgent, as this is the only possible way to contain the economic damage and the vast distress that will be caused globally if the web of transactions joining us all together is severed for any length of time.
Governments around the world have, rightly, turned to massive spending to try to limit the immediate damage to people’s livelihoods. But fiscal sticking plasters, no matter how big, need something to stick to. It will not be long before the crisis management focus needs to turn from short term public health to getting the economy growing again by repairing the engine of prosperity, our mutual dependence.
Reference on this page
1 Burgess, S., Propper, C., Rees, H., and Shearer, A. (2003), ‘The Class of 1981: The Effects of Early Career Unemployment on Subsequent Unemployment Experiences’
About the author
Professor Diane Coyle, Bennett Professor of Public Policy
Professor Coyle co-directs the Institute with Professor Kenny. She is heading research under the progress and productivity themes. Learn more