Precedents Can Help Us Understand This Unprecedented Crisis
When disaster strikes, business and economic historians are asked to compare what they study with what everybody is experiencing. When a massive catastrophe strikes, like our current pandemic, the power of the unprecedented seems to leave historical analogies in the dust.
This crisis looks unprecedented because it really is. Combine a global pandemic with a global economy that has been put into an induced coma. Playbooks in both government and enterprise are shredded as executive committees meet over Zoom and figure out what to do next.
In this hurricane, can a long-run perspective provide any guidance in the face of this extraordinary moment?
The answer is yes, but it’s complicated.
The fact is that politicians and economic decision-makers are already using precedent. They are using their understanding of what worked and what didn’t in the past in a hundred ways every day. “What did we do in 2008?” is a popular question, at least in financial institutions. Trembling before the market meltdowns few have ever seen, advisers fall back on citing historical precedent in market cycles to reassure investors.
So, a paradox: in unprecedented times, precedent is the starting point. In our own research, time and again we see the following: when businesspeople and politicians are faced with something new or unexpected, they often see reflections of past actors and actions – whether or not the analogies fit.
In Hall of Mirrors, Barry Eichengreen writes about policymakers “profoundly informed by the received wisdom of the mistakes of their predecessors.” In Europe, in 2011 the German-dominated European Central Bank raised interest rates, haunted by the ghost of historical hyperinflation, and ignited another recession. The power of those implied “lessons of history” led them to create new challenges.
So, precedent should come with a warning label. Yet there are many possible insights from our collective past that we can learn from. As business historians, let’s explore five main insights.
First, to the most obvious: the economy will eventually bounce back. Pent-up consumer demand and a positive swing in the business cycle made the post-pandemic 1920s roar. The same scenario happened after 1945, only bigger. Eventually, in six months or a year, people will need to buy cars and have haircuts, and the deep economic downturn we face will subside. Results may vary.
Second, we often hear we are “at war.” Wartime emergency fast-forwards historical processes.
In the reconstruction, look for increased pressures for a revised and updated social contract between citizens and governments. This will be different from the post-Second World War Veteran’s Charter and welfare programs, which privileged male breadwinners and continued close business-government relationships. The reconstruction may result in a willingness to address questions of inequality that have shaped recent public discourse around taxation and wealth.
Third, and connected to a revised social contract, are concerns around deficit spending and debt. How do we pay for this massive intervention? Again, our collective experience suggests massive deficits are eventually tamed by prosperity and increased taxation. Expect inflation to return.
Fourth, we are witnessing a vast expansion of state power that may not soon recede. Governments are re-emerging as the defining actor in both economic and social terms. The new era’s opening scene is already upon us in the form of the COVID-19 Emergency Response Act, which authorizes truly colossal increases in government spending.
Just as there are no atheists in foxholes, there seem to be no austerity advocates in the face of pandemic – another echo of past crises. Once governments acquire power, they are loathe to relinquish it. Financial institutions and large enterprises take note.
Finally, these developments are likely to be much more permanent than their architects claim, rolling back the frontiers of neoliberalism. Coronavirus will succeed where the Great Financial Crisis failed in dismantling the market-friendly, elite consensus that has dominated discourse since the 1970s.
History is not a predictive mechanism. The long-run experience does not easily divulge its insights. It’s seldom straightforward. Nobody wants to play the role of André Maginot and prepare for the last war, not the one to come. Each crisis is different.
Moreover, the debates often have a recurring pattern, but identifying those patterns and connecting the dots demands a deft hand. Remember: what worked, what didn’t (and why), and how did we get here are three good questions that may not have an easy answer.
But your company’s or your country’s experience may have something to say about each. Then you can ask “what’s different?” and play the hand dealt to you.