Laws of Contagion & the Role of Government

Economic theories have found diminishing role of government as free markets take over the role of the invisible hand to balance supply and demand through price signals, which is however the simplest way of defining all problems of the world.

When a contagion brews, it is on the contrary only the Government who can restore any semblance of a counter attack, or checks and balances that can not only stave off a contagion but also restore the normal working of an eco-system.

But first of all free markets and economies are most ill-equipped to stave off a contagion that could be from a spread of a virus to the financial contagion, which could be negative spillover effects of a financial crisis that is initiated in one part of the country or the world which spreads over to the entire country or various parts of the world (global contagion); there could be positive effects as well, when there is a boom associated with certain markets and the spillover effects drive co-movement of prices across several countries.

The free markets cannot rightfully allocate the resources to the right solutions as the solutions themselves cannot evolve from the normal functioning of the market which has actually failed to read the price signals or has collapsed to operate on its own from huge asset liability mis-match or from unreasonable expectations.

If we restrict ourselves to the Corona virus alone, we can see that individuals or collectives are ill-equipped to take decisions on their own to respond to the crisis. First of all they have very little information or they could have large poodles of mis-information that neither helps the cause or diminishes the propensity to act wrongfully.

On the other hand the laws of contagion are steeped in probability calculations that left on its own without distancing people, the virus would actually end up infecting 70% of the population. With distancing, this probability comes down drastically but extreme distancing cannot happen from normal ways of incentivization that the laws of economics provides.

Take for example that if we have to distance two sets of people one young and one old, Fine Theorem has shown that younger people having low susceptibility would tend to distance themselves less than older people thus increasing the number of people affected, thus adding to the probability of more people getting affected due to the virus.

A contagion can only be stopped by complete and unequivocal distancing that can only be orchestrated by the government, no incentives or dis-incentives would do.

The best example of this can be found in Singapore and Hong Kong who acted swiftly to distance people from each other and they could stymie the tide of infections speedily. But what can happen in such small communities are difficult to be enacted in large countries.

The economic side of this problem cannot be lost sight of. There could be extreme hoarding happening due to the actions of distancing and the fear psychosis of people cannot be lost track of. By stopping movement of people we would also restrict movement of goods and services, this could stroke a cascade of events that also needs to be tackled.

The jury could still be out on the rules of contagion, but on Supply Chains the impact is loud and clear. The more inter-connected, integrated and differentiated the supply chain is the more severe the disruption when a pandemic strikes that quarantines people and the biggest fallout is in the area of information & logistics leading to stranded assets. Hoarding from the ills of bull-whip effects actually exacerbates this problem.

No pandemic lasts for a long time, as solutions emerge, the simplest being quarantining people and restricting the spread. But we have seen that this has taken months to organize, thanks to over-confidence in dealing with a situation that we knew little of. Who would have thought that a small market in Wuhan could lead to a global pandemic in less than two months, when all that we had to do is stop all movements to and from the epicenter. But now that the world has become the epicenter itself, we need a complete lockdown.

How could we rebuild a supply chain that has suddenly been reduced to number of a mothball, stranded assets, devoid of information both from the upstream of the chain and the downstream, with non-existent feedback loops? How do we pick up the major supply chain pieces like inventory at stocking points, inter-mediate et al?

When hoarding starts to happen from toilet papers to sanitizers, it would eventually roll over to all essential goods.

The visible hand of the government must take over, from tackling the spread of the disease to the stopping of unnecessary hoarding of items, we have a long list of tasks waiting to be ticked off speedily.