30 April 2020
by Vincent Carpentier

COVID-19, long economic cycles and the prospects of a new world

The eruption of COVID-19 has (re)generated discussions about the possible transition to a new world and a new social contract. This is of course due to the terrible loss of lives and livelihood caused by the virus. This is also because the virus has exposed our personal and collective vulnerability caused by simmering tensions between human and economic developments associated with the ongoing and increasingly important question of inequalities. Signs of these tensions have been widely documented and include amongst others the heroic struggle of the staff of underfunded social and health infrastructures to cope with their public service mission, the lack of social safety nets for many sections of the population, the precarious positions of underpaid key workers and those not able to work from home as well as the very unequal experiences of the lockdown by social groups due to variations in living and housing conditions. These key issues should not hide a sense of solidarity and the growing consensus in public opinion for the need to address these inequalities as well as the beginning of a policy shift. But what comes next? Many commentators stress that the world has to change, that things can never be the same again. Is this the premise of a new world or an ephemeral adaptation driven by survival instinct? Will we go straight back to normality once we are saved and out of an emergency mode? Or will a new, more just social contract emerge?

I propose to offer a historical perspective on this revived discussion about the old and new worlds through the lens of long economic cycles or Kondratiev cycles, named after their discoverer, the Russian economist Nikolai Kondratiev (1892–1938). I don’t pretend to offer predictions and I also acknowledge the debates on Kondratiev cycles’ existence or deterministic views of history. There are many interpretations offered to understand the cycle, linked to infrastructure investments, wars, imperialism, technology, gold discovery and so on. The one I use here, while not excluding those, considers that periods of growth and crisis reflect historical connections and tensions between economic and human developments. Within this approach, the cycle offers a way to understand historical progresses and setbacks of the social sphere (health, education, housing, social security, etc.) driving human development as part of the periodic crises and transformations of capitalism. I propose to look at these past crises to reflect historically on the contemporary debates on a post-Covid-19 “new world”.

Crises and lost opportunities

The last time the “new world” (re)appeared on the agenda was during the great recession (2008-?), as the subprime financial crisis revealed structural weaknesses of the real economy strongly connected to unsustainable inequalities. As the State was bailing out banks, a new world narrative on social responsibility emerged, demanding national and global transformations to jointly address the disconnect between the creation of wealth and its distribution. However, in a remarkable twist, the narrative behind the crisis was soon reversed with the public deficit, rather than the combination of private debt and hyper concentration of income, seen as the main cause of the recession. The public deficit, significantly increased by the bailout, was to be repaid not by a fairer taxation system to raise additional income but rather by reducing spending through the politics of austerity in many countries, and notably in the UK.

In that sense, the Great Recession continued and even accelerated the neoliberal transformations initiated by a previous phase of depression known as the Long Stagnation (1973-?). The post-2008 world further rolled back the Keynesian post-war settlement by intensifying the retreat of the welfare-state, the (re)concentration of income at the top and the reduction of taxation coinciding with labour market deregulation and the control of public spending towards an increasingly marketised social sphere accelerated by the financialisation of the global economy. In short, 2008 was a missed opportunity to address the increasing tensions between the creation and distribution of wealth that (re)emerged after the Long Stagnation, and challenge what Piketty describes as a regime of inequality.

Crises, transformations and new worlds

To see or imagine what transformations towards a new world might look like requires exploring crises further back in time. Regulation theory interpreted the previous economic downturns associated with Kondratiev cycles such as the First Depression (1830-1848), the Long Depression (1873-1897) and the Great Depression (1921-1939) as resulting from unsustainable levels of inequalities. However, recovery from these crises was different from 1973 and 2008, culminating, under social and economic pressures in the productive use of an overaccumulated capital (through taxation) to fund countercyclical social transformations. These transformations were key drivers of human development (i.e., labour legislation, including on child labour and the developments of public education, pensions and health systems) producing systemic changes and a rebalancing of the regime of accumulation which was decisive to the realignment of social and technological systems and the revival of economic development. These crises produced systemic changes which remained in place after each period of recovery. They proved to be key steps to produce the new world that emerged as the combined result of the severity of the Great Depression and the two destructive World Wars that framed it, which necessitated more fundamental transformations of the regime of accumulation symbolised by the development of welfare states that united the social and economic agendas until the Long Stagnation of the 1970s changed the rules of the game once again.

Crises and questions of survival

This overview suggests that although transformations were responses to internal structural contradictions of the economy revealed by the crisis, they were also sometimes triggered by abrupt, often life-threatening events (often but not always caused by the economic system). These events, which include not only wars but also natural disasters or public health crises, were so brutal that their actual or potential impacts on society and economy required unexpected or once thought to be impossible transformations. Regular cholera outbreaks linked to urbanisation and industrialisation were, for instance, critical to the development of health and hygiene policies (e.g., the public health Acts of 1848 and 1875). The 1918 Spanish flu spurred, by way of another example, the construction of national institutions (e.g., Ministries of Health in the UK and France). Although the principles and ideas of the welfare state were first imagined and implemented during the Great Depression, they became set in stone as war was still raging and the endeavour to build a new world was seen as inescapable. For instance, the projects to reconcile the productive and social justice agendas formulated by the UK Beveridge report and the programme of the French National Council of the Resistance (1944) were concretised after the war by the permanent integration of the tax-based funding of the welfare state into the economic system (including comprehensive social security, health and education systems). This level of funding and social ambitions, considered as unaffordable and utopian until then, drove economic development for more than three decades.

This questions whether COVID-19 might be a catalyst for transformations that should have happened after the 2008 crisis. There are signs of this. One of them is the massive public financial support of many out-of-work employees and self-employed workers in many countries to sustain the economy and address the immediate inequalities exposed by the virus. This has in effect (re)created a temporary social safety net in the UK. Another sign is the call for firms, especially those receiving public money, from these packages to restrain from paying dividends to shareholders in France and the UK. However, the key question is about obligation and whether such temporary changes can become in one form or another structured as permanent policy for a new world. A good example is the plan by the Spanish government to make its recent adoption of the universal basic income permanent. This is important as there are also signs of reverting to business as usual once this crisis is over. Time will tell whether the massive deficit will be filled by austerity policies once again, leaving us more unequal and vulnerable, or by a creative progressive taxation system, driving a new articulation between wealth creation and redistribution.

Global crisis and global solution: a new Kondratiev cycle driving a more equal and sustainable world

One of the excuses given for the missed opportunity to transform the economic system after 2008 was that global competition and mobility of capital constrained the capacity to fund through taxation the development of social systems contributing to the reduction of inequalities at the national level. The fact that COVID-19 is about global survival and spares no country might lead governments to question and push for a regulation of the mobility of capital to address the tensions between tax evasion and the underfunding of health and social systems, which are now vital nationally and globally. A shift from unregulated global competition to closer cooperation is one of the ways to transform the current form of globalisation by jointly addressing the inequalities within and between countries instead of reverting to the dangerous old world of nationalism.

Although the lens of Kondratiev cycles seems to be centred on old industrialised, high-income countries from the West, lower- and middle-income countries are also part of the story through not only their contribution to the world production but also due to colonial and post-colonial forms of domination, which have been connected in ways to address past crises by exporting capital and find new profit opportunities. Structural adjustment policies were direct translations of austerity policy in the 1970s that produced even more acute tensions between economic and human development in these countries, generating highly unequal societies with strained social and health systems and making them more vulnerable to the virus’ spread. Although, the argument for global social justice should stand on its own, the fact that COVID-19 knows no borders should make each country realise that addressing its own vulnerability means the reduction of inequalities and the strengthening of social and health systems not only at home but also across all countries. This sense of global destiny, which is crucial in order to avoid a second wave of COVID-19 and prepare for future pandemics, necessitates another type of globalisation to address both inequalities within and between countries. The question of debt relief for low- and middle-income countries is back on the table. This remains to be seen whether debt cancelation will happen and whether this might be a one off or part of a structured and formalised new world order taking inequality seriously.

The reaction to COVID-19 also creates a timely (and urgent) opportunity to address another global threat related to environmental sustainability, which has huge consequence on our survival yet remains unaddressed. One of the reasons is that the environmental crisis represents a gradual (but not slow) process leading us towards disaster without a clear turning point. By contrast, the virus is associated with an imminent danger and an outbreak with visible and immediate consequences that it instinctively forces us to act. Thus, COVID-19 has shown that massive increases in public funding and a near-complete shutdown of the economy are possible and acceptable for the public if survival depends on it: this shows that the radical but far less extreme adaptations to reach environmental sustainability are well within our grasp. However, it will be key that the post-COVID-19 economic reconstruction does not ignore the environment.

Not only why we should change but how!

So, is this a new world or a reinvented world? Kondratiev cycles tell us that change towards a new world is possible but depends on an open political process. A first scenario is to go back to the “normal world” with the reduction of huge public deficits caused by the virus based on austerity. The second is a new world based on the redistribution of wealth and the funding of public services that have proved to be not only about driving social progress but also sustaining the economy and boosting our survival. This latter scenario is effectively a new Kondratiev cycle that would jointly drive human and environmental development. The difficulty will be to ensure that this is not an aspirational but a concrete change.

The key question is not about why we should change but about how to do so. Why did more just and equitable socio-political changes work in the 1840s, 1870s and 1930s but not in the 1970s and 2010s? The new world will need key mechanisms and principles and social contracts (at national and global levels) that will address pre-existing tensions that the virus has made more obvious and deadly. These tensions include the need to rebalance the economic and other dimensions, which are connected to the imperative to articulate our short-, medium- and long-term interests. Finally, the crisis revealed the interconnections of public services generating either vicious circles or positive synergies. This means that the social contract should be operationalised by progressive taxation ensuring that the crucial increase in expenditure on health and care is not done to the detriment of other welfare activities such as education, labour and pension rights, or housing as well as the global support of international solidarity and the environment. Past Kondratiev cycles show that these sectors can grow and advance together during crises.

A new world might be based on making the following case: the changes recently made or planned as part of COVID-19 and which were deemed impossible before the crisis, must be implemented in “normal times”. The lens of the Kondratiev cycles shows that this is far from automatic, but still possible. If we can’t change now, then when?