Aditya Chakrabortty is, variously, the Guardian’s economics leader writer, a columnist at that newspaper and a modern history graduate. Three excellent reasons as to why we should be a little wary of his ability at economic prognostication – even of whatever might pass for his economic knowledge. He doesn’t disappoint today:
That is the prospect hanging over us – and not just this year. The Bank forecasts that 2021 will be the year of the bounceback, the V-shaped recovery. Such a scenario seems to me utter fantasy. Pubs, cafe and theatres will shut by the score, many more businesses will run out of cash and time. At the end of the summer, the class of 2020 will leave school, graduate from university – and there will be scarcely any jobs for them.
This is to miss the most basic economic point. The thing of value in an economy is not the current structure of ownership, nor even the current method of organisation. If we want to be more precise, the ability to add value – which is what GDP is, value added – does not depend upon those things. Sure, they’re useful, sure, they’re the methods and manners of organisation and ownership that have grown up and led to the value that has been added, or is added in normal times.
But the thing truly of value in an economy is capital. No, not in that Marxist sense of Das K and all that, for by far the most valuable portion of capital is human capital. The knowledge of how to do stuff that is.
If we want to limit ourselves to that Das K stuff, we can tell a useful story all the same. Take airlines. So, without government support, they’re all bust. Virgin Oz has gone that way, into liquidation, Virgin A will do unless Branson flogs a chunk of Virgin Galactic to aid it. Hundreds of the smaller airlines are going to go bust and into liquidation. What happens next?
Building an airline
I’ve watched, up close, some friends building an airline. Sure, they failed, but they did get into the air and operate for a few months. It was surprising quite how easy it was to piece it together. Well, not the success – that eluded them. But everything other than selling the tickets and keeping going can be rented or hired. And here’s the thing – in this post-coronavirus world, they’re all going to be real, real cheap.
It’s long been true that you can rent or lease planes. You can do this dry (i.e., the machine) or wet (including crew etc.). Every airport will sell you fuel if you’ve a credit card. Landing slots are required, but we’ll come to that. Then, you sell tickets and you’re away.
OK, sure, there’s a bit more to it than that, but not all that much. Some permissions and so on. But one of the things you don’t need is massive amounts of capital. You don’t have to buy a place, for example. A small puddle jumper airline really is something that any fast talker with a few contacts could pull together. I don’t say succeed at, but getting going is all that’s needed here to put price pressure on everyone else in the marketplace.
OK, there’s a bunch of assets you need to be able to build an airline. And many airlines will have gone bust. What does that mean for the price and availability of those necessary assets to build a new airline?
The big point here
Sure, the big airlines are all cutting and shrinking. Not just to survive, but because they’re really fairly certain that the flying world is going to be smaller than it was before. OK, that’s fine.
But everything an upstart airline needs is going to be out there, and it’s all going to be very cheap. And one of the things we know about the airline business is that there’re always a few wildly enthusiastic out there willing to try to launch a new brand. And if the component parts are cheap, then they will.
The airline world is going to see a shuffling of who owns the various assets, most assuredly. But it’s not going to see a destruction of the Das K style capital assets. We’re not about to plough up the runways, the reason we stick those ‘planes in deserts is so they don’t rot and so on.
Further, the pilots aren’t going to forget how to fly, not for some time yet at least, dolly trollies won’t forget how to pour soup at 30,000 feet. The algorithms to ensure everyone on the ‘plane pays a different price aren’t going away. The human capital, that knowledge of how it all works, isn’t destroyed that is.
The same being true of the larger society. By far our most valuable asset, that human capital of knowing how to be a rich society, isn’t destroyed, diminished or even impaired by the current recession. It is for this reason that post-WWII Germany had perhaps the fastest economic growth of any country anywhere ever. Sure industry had been bombed flat then bombed again to make the rubble bounce. 5 years after they were allowed sensible economics again – 1947 or so – they were richer than they had been before the war. Richer therefore than they’d ever been. Because the knowledge of how to do it was there in that general population. Not the overarching stuff needed to plan how to do it of course, but that local, Hayekian, knowledge of well, this is how a shop works well, here’s how to interest the folks to come work in a factory, hairdressing is pretty cool in this manner and so on and on throughout all of the things that are done in an economy.
Working out how to do all of these things for the first time is difficult which is why a reasonable growth rate for a rich place is 2 and or 3% a year. Going back to doing what we already know how to do is very much faster. Yea, even after the total destruction of an economy. Because that knowledge, that human capital, ain’t the thing that gets destroyed.
That Chakrabortty can’t see how it can happen doesn’t change the fact that it will. Of course this is going to be a V shaped recession. The growth rate coming out of it is going to be high. How high is an interesting question, whether we get back to 2019 levels by 2021 or 2023 is something to be usefully asked and pondered upon. But the idea that we’re going to drop 25% of GDP then be stuck with a 2% growth rate and thus take a decade to get back is ludicrous.
Well, except for one thing. We’re only going to get that V, that bounce, if we do go back to what we already know how to do. If for some reason we turn insane and insist that this time it all has to be different then we will indeed be stuck with 2% growth. Because that’s the growth rate we get when we try to do stuff different. That is, it’s only if we listen to the idiots demanding a Brave New World that we’ll remain poor.