Is Covid-19 an Exogenous Shock?

“We cannot solve problems by using the same kind of thinking we used when we created them.”

                                                                                                                                Albert Einstein

Introduction

The COVID-19 pandemic has spread around the world with a speed not known before and triggered a global economic crisis; with global GDP contracting by more than 6% in 2020 (World Bank 2021). This spread was caused by the intricately interconnected world economy with its value chains and travel lines spanning and criss-crossing the world. The thing itself, the COVID-19 coronavirus, has been treated as an exogenous shock to the economy. Virtually, any economist would say that the COVID-19 shock is an exogenous shock, that is, one that originated outside the economic system. Some eminent economists have appeared on televisionto say just that. 

Whether or not this is an exogenous shock is important not only from the point of view of analytical clarity, but also in framing policy to deal with this and other such shocks. In this century alone, there have been a number of medical shocks, the best known being the SARS-CoV-2 epidemic that preceded the COVID-19 and H1N1 (swine flu) epidemics that have both gone around the world.

Two Types of Shock: Endogenous and Exogenous

Economists almost invariably divide shocks into two types, endogenous and exogenous. Endogenous shocks are those that arise from within the economic system, or are self-organised (Sornette 2006). The Great Recession of 2008 was sparked off by the shock of the financial crisis, the subprime mortgage failure. This clearly originated from within the economic system. In India, the demonetisation of 2016 was a shock caused due to an economic policy. Therefore, it was an endogenous shock from within the economy, including its policy formulation and governance system.

COVID-19, or SARS-CoV-2, for that matter, are different from the above-mentioned endogenous shocks. They originated not from the economy or even from human society, but from the animal world. So, why is there any doubt that this is an exogenous shock, that is, an external shock?

A truly exogenous shock would be something like an earthquake and the tsunami that it might set off. Of course, the manner in which the shock affected the economy would, in turn, depend on the nature of the economy. The Fukushima tsunami affected a region of Japan that was intimately connected with global value chains in automobile manufacturing, among other products. This spread its effects quite widely across the globe. Perhaps the most spectacular exogenous shock that the world has faced was that of the asteroid hit that arguably caused the extinction of dinosaurs and changed the history of the planet.

In brief, an endogenous shock is one that is created by the self-organisation of the system, being considered, in this case the socio-economic system; while an exogenous shock is something external (Sornette 2006). Economics has a long history of grappling with endogenous and exogenous changes or shocks. Technology or knowledge were dealt with in economic analysis as something exogenous or external to the economic system. It was only with the formulation of the theory of endogenous technical changes (Romer 1990) that technology and knowledge from which it is created were analysed as being created within the economic system through the allocation of resources to R&D (research and development). 

COVID-19 an Endogenous or Exogenous Shock?

So, is COVID-19 an exogenous shock? It is obviously not something that came from outer space and hit the planet. It is a virus that came from the animal world around us (Johnson et al 2020), which is part of Planet Earth. However, it was not something that came solely from a process of nature, such as the shifting of tectonic plates that would cause an earthquake. It was the result of human interaction with nature that brought about the transmission of a virus from one species to another—in this case, as is most likely from bats, through some intermediary host to the human species. Many viruses are said to exist in non-human species. However, it is only when close human-nature interaction takes place that this becomes a problem for humans when viruses jump from one species to another.  A recent study points out, “ … our findings provide further evidence that exploitation and anthropogenic activities have caused losses of wildlife habitat quality, have increased opportunities for animal-human interactions and facilitated zoonotic disease transmission” (Johnson et al 2020).

Therefore, if we take human society as a whole in all of its interrelations with the rest of nature, then COVID-19 is not an exogenous shock, it is an endogenous shock. However, is it a shock endogenous to the economic system? Let us define the economy in a simple manner as the production and exchange of goods and services. All economies necessarily involve exchanges with nature. For instance, we take wood, water, or nutrients from the soil for many products. However, this taking is never a one-sided activity: there is always an exchange, where something is taken and something else is put back, whether it is the crop residue that is allowed to go back into the soil or the wood chips from cutting wood. In the process of interaction, there is the co-creation of what exists today, whether it be denuded forests or acidic oceans. Therefore, interaction or exchange is part of any relationship, not only those between humans, as in trade, but also those between humans and nature.

Exchanges of humans with nature are then part of the economy—an exchange made obvious by our pollution of not just the atmosphere but every part of the biosphere. This exchange affects and influences natural processes. As the eminent primatologist Jane Goodall points out, our destruction of biodiverse forests has forced animals “to crowd closer and closer together, which means that a virus can pass from one animal to another. Also animals are forced into closer contact with us … When they (different animals) are in stressed conditions in the markets as pets or whatever, that’s when the virus that started in another animal ends up in this animal and now that it can cross the species barrier into humans, providing a similar kind or family of viruses in humans and they bond and they make a new mutation, which has caused the covid-19” (Goodall 2020).

The wet markets of China or bush meat markets in various parts of the world are just some of the myriad locations of these economic relations with nature. With the jump of viruses to humans promoted by such close and continuous proximity between humans and other animals, it can be concluded that COVID-19 is not an exogenous but an endogenous shock, a shock co-created by human economic relations with the biosphere. COVID-19 is a consequence of such economic exchanges—unintended, but a consequence, nevertheless, of the way in which the human-nature interaction has developed, resulting in various species being pushed into over-crowded and stressed conditions in close and continued proximity with humans.

Consequently, not only do we use the resources of the biosphere, but we also change or create them. Economics has yet to come to grips with this co-creation of the natural world today, which is why shocks such as COVID-19 are characterised as exogenous shocks. However, in order to deal with these shocks, we have to realise their endogeneity, their co-creation, through our interaction with nature. Economists starting from Lionel Robbins’s statement that, “a relationship between ends and scarce means which have competing uses,” developed a theory that stressed the efficiency of cost reduction as the criterion of selection in the market (ceteris paribus, or all else being equal, of course). This theory, combined with capitalism’s drive for endless accumulation, resulted in humanity becoming unmindful of the changes to the means (or resources) that human actions were bringing about. Now, the unintended consequences of our modifications of the biosphere, are coming back to haunt us, not only in our dreams, but in our waking and locked-down hours too.

Conclusion: Incorporating Reflexivity of Co-creation in Economic Analysis

What does this mean for policy? While we rightly pay attention first to social security, followed by adaptation to COVID-19 and similar threats, we also need to think of mitigation, or reducing the risks from our exchanges with the biosphere and the environment or nature as a whole. 

We must look to see how our theories and our instruments of economic analysis can incorporate the reflexivity of co-creation; or that in economic relations, we do not only use resources; in some ways, we also create them.

We are in the age of the Anthropocene, an age when atmospheric, biospheric, and other planetary processes are being altered by humans, or when humans have also become a force of nature, along with physical, chemical, and biological processes, in modifying and making the world. To deal with the challenges of the Anthropocene, we need a rights-based and gender-responsive economics that recognises the co-creation of resources (our world), including COVID-19 and other viruses yet to come, by humans, in conjunction with and through altering natural processes. It is not just the pandemic that is created by the global economy; the very virus, COVID-19, and its transmission to humans is co-created by humans in interaction with the biosphere. To understand and then resolve such problems, economic theory needs to come to grips with the Anthropocene and its social and environmental forces.

There are important policy consequences of the endogeneity thesis. Even while we try to minimise damages through vaccines, etc, it is also necessary to reduce pandemic threats by modifying our interaction with nature; for example, reverse the reduction of the space for animals that results in crowding, ensuring biosafety in livestock production, or reduce interactions between domesticated animals and wildlife (Johnson et al 2020).  

Recognising that COVID-19 is an endogenous shock is only the first step in developing an appropriate economic analysis. This needs to be followed up by theorising or modelling human-nature interaction and integrating the co-creation of the natural world into economic theory. Thus, we must also look to see how our theories and our instruments of economic analysis can incorporate the reflexivity of co-creation; or that in economic relations, we do not only use resources; in some ways, we also create them. Developing theories based on the reflexivity of co-creation and co-evolution are much more difficult tasks.