The Economics of Pandemics from the Black Plague to the Present: Will History Repeat Itself, or Has the Narrative Changed?

We have all heard the phrase “history repeats itself.” When it comes to COVID-19, the question is, have we learned anything from past pandemics to help guide us through the unprecedented economic challenges we face today, or has the narrative changed?

Recently, there have been several fascinating articles that provide insight into both the challenges and opportunities created by pandemics.

Europe’s Early Experience

The Ravages of Time” from The Economist raises awareness about prior research on the Black Plague that shows that while Europe experienced enormous losses of human life, per-capita income across the continent rose, and these wage gains were permanent. The original research conducted by Nico Voigtländer, of the University of California, Los Angeles, and Hans-Joachim Voth, now of the University of Zurich, was published in the Review of Economic Studies in 2013. Based on the results of their model, the two authors went so far as to conclude that “death and disease spelled riches and power, contributing to Europe’s economic ascendancy.”

The article also notes how trade routes helped these pathogens spread. Following the plague, however, trade routes were typically closed to stop the pathogen from spreading among regions, bringing to a halt the economic benefits of trade. The article from The Economist also points out how subsequent waves of the plague in the 17th century put the economic trajectory of northern and southern Europe on different tracks, citing research from Guido Alfani, of Bocconi University, Milan, Italy, originally published in the European Review of Economic History in 2013. This divergence in economic prosperity was mainly because of the higher death rate in Italy and the pervasiveness of the deaths in both rural and urban centers. Southern Italy (the Kingdom of Naples) lost 30–43% of its population during this period, whereas northern Italy (north) lost 30–35%. England and Wales, in contrast, only lost 8–10%, whereas France lost 11–14%. Italy’s population continued to stagnate, as did its urbanization rate—the opposite of what was taking place in northwest Europe, which continued to drive the region’s growth over the coming decades. In his paper, Alfani notes, “In seventeenth-century Italy, [the] plague caused a demographic catastrophe that took many decades to recover”(European Review of Economic History, 2013).

Given how much more knowledgeable governments are today, the article concludes that countries now have much greater control over their destinies based on the way they ultimately choose to respond to a pandemic.

The Link Between Animals and Disease

The Saturday Essay from The Wall Street Journal, “The Germs That Transformed History,” further expands upon many of the points from The Economist article and includes other relevant cases. The report notes the uniqueness of the COVID-19 pandemic as a phenomenon spreading rapidly around the world, leaving human and economic carnage in its wake; the Spanish Flu of 1918–1919 (which killed 675,000 people in the United States) is probably the most analogous situation. Although global trade routes no doubt played a role in the spread of COVID-19 and did so during the Spanish Flu as well, what is most alike about these pandemics is that they both occurred when it was relatively easy to travel between continents, allowing the pathogens to spread more quickly.

The author in this essay proceeds to discuss the devastating effects that European diseases, particularly smallpox, had on native populations in both North and South America during the colonial period. The author raises a critical question: Why didn’t Native American people have some unique disease themselves to stop the European settlers in their tracks? Well, North American populations were, in a sense, healthier because, unlike their European counterparts, they were not contending with any wild animal diseases prevalent in the region. In contrast, diseases (smallpox, measles, influenza, etc.) were fairly common in Europe because early Eurasians had begun to domesticate livestock approximately 10,000 years earlier, and domestication allows diseases to more easily jump from animals to people.

Notwithstanding China’s claims that it has shut down its wild animal markets, many remain open in other parts of the world, such as in Africa. Until all of these markets are closed permanently, the risk of future pandemics remains high, according to the author. Similarly, there are also well-documented instances of pathogens spreading across European battlefields, such as during the Napoleonic Wars, diseases that ultimately “proved far deadlier than guns and swords,” according to Voigtländer and Voth (Review of Economic Studies, 2013).

The article from The Economist reminds us of the divergent paths that later waves of the plague put northern and southern Europe on, starting in the 17th century. This Saturday Essay from The Wall Street Journal draws a comparable inference. Dissimilar economic pathways may develop not only among countries but even within areas of the United States as a result of COVID-19. Despite its vast resources, there are substantial differences within the population of the United States when it comes to preexisting health conditions (a significant risk factor for COVID-19) based on socioeconomic levels and geographic variations among its states. Less densely populated states, such as Montana, have much lower mortality rates from COVID-19 than New York, which is home to the densely populated urban centers of Brooklyn, Queens, Manhattan, and the Bronx.

Notably, the Federal Reserve Bank of St. Louis’ report, “Economic Effects of the 1918 Influenza Pandemic,” from November 2007, predicted many of the same challenges the United States is now experiencing with COVID-19: “Despite technological advances in medicine and greater health coverage throughout the 20th century, deaths from a modern-day influenza pandemic are also likely to be related to race, income, and place of residence.”

Decoupling Global Supply Chains

The Wall Street Journal provided another in-depth viewpoint via a different Saturday Essay, “Will The Coronavirus Bring the End of Globalization? Don’t Count on It.” The author notes how prevalent the discussion about decoupling from China has become but stresses most American firms have yet to pull back from globalization. The author further emphasizes that, despite the economic downturn the coronavirus has brought, markets should not expect a permanent deconstruction of the integrated global supply chain system.

From my perspective, this may present a naïve understanding of the current sentiment in the United States. As COVID-19 continues to affect the United States (with approximately 92,900 deaths as of June 6, 2020, according to the CDC), and as the presidential election draws nearer, the theme of decoupling will no doubt receive more attention. Realistically, the United States should be able to produce essential pharmaceuticals such as antibiotics and manufacture respirators domestically so that its citizens are not subject to the global supply chain risk from China during a pandemic.

If one agrees that the risk going forward of a future pandemic is high, then this should only increase the desire of U.S. citizens to support an acceleration of the delinking from China. In 2017, President Donald J. Trump began to advocate for steel tariffs as a national security issue. It is not too difficult to see the connection between President Trump’s position on steel tariffs back then and the push to decouple American corporations’ supply chains from China today. Add in the fact that, by the end of 2019, specific actions taken by the Trump administration over the prior two years had stopped the World Trade Organization’s (WTO’s) ability to solve trade disputes, and one begins to wonder what global trade might look like in a post—COVID-19 environment.

A working paper from the Peterson Institute for International Economics, “Why Trump Shot the Sheriffs: The End of WTO Dispute Settlement 1.0,” sheds light on the shift in strategy by the United States: “The Trump administration now appears to have abandoned the WTO system as a way of addressing its complaints with China. As part of its phase one deal, concerns will be raised bilaterally and solved at the discretion of political appointees.” Formerly, the WTO’s Appellate Body would address trade disputes.

Conversely, a video interview from the Financial Times,Have the U.S. and China Passed the Point of No Return?,” highlights that, because of these tensions, Chinese direct investment in the United States has continued to drop to historically low levels since China’s economic rise began. The Financial Times goes on to note that, from the Chinese perspective, this “crisis is more about the decline of the West than it is about the rise of China.”

The Role of Narratives

Robert J. Shiller, the Sterling Professor of Economics, Department of Economics and Cowles Foundation for Research in Economics, Yale University; Professor of Finance and Fellow at the International Center for Finance, Yale School of Management; and a Nobel Laureate, places considerable importance on the role narratives play in economics, and he is the foremost expert in this emerging field. By “narratives,” Professor Shiller means the stories that catch people’s attention and influence their economic behavior. He is particularly interested in viral narratives.

When someone as brilliant and artful as Professor Shiller starts to expend considerable time and attention on this emerging field, it is time to pay attention to his research. The more exposure I have had to Professor Shiller’s ideas on the role stories play in economics, the more relevant I believe they are to the real world. Simply put, they seem to outshine many advanced econometric models and esoteric theories, which more often than not fail to do an adequate job of explaining most major economic events and can be painful for most to understand.

Professor Shiller outlined his main ideas on Narrative Economics during the presidential address to the American Economic Association in January 2017: “The human brain has always been highly tuned toward narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives ‘go viral’ and spread far, even worldwide, with economic impact. The 1920–1921 Depression, the Great Depression of the 1930s, the so-called Great Recession of 2007–2009, and the contentious political–economic situation of today are considered as the results of the popular narratives of their respective times.”

Shiller goes on to note that naming an economic event sometimes makes it a “self-fulfilling prophecy.” He points out that, for example, at the height of the Great Recession, the unemployment level was lower than that of the 1981–1982 recession experienced under President Ronald Reagan. He then goes on to argue that naming the 2007–2009 economic downturn, the “Great Recession” served political leaders’ self-interest. They could now “invoke parallels to the Great Depression to justify their requests to apply stimulus.” Shiller also states in no uncertain terms—regardless of whether one agrees or disagrees with his politics—that President Trump is a “master of narratives” (American Economic Review, 2017).

Near the end of his remarks to the American Economic Association, Shiller raises critical questions to keep in mind when thinking about narratives and about how they can drive future economic activity, specifically, “How will the emerging twists in the narratives affect [the] propensity to spend, to start unconventional new businesses, to hire new employees? In short, how will the animal spirits be affected?”


Might different economic trajectories develop among regions in the United States as a result of COVID-19 in a similar fashion to occurrences in Europe following the subsequent waves of the plague? Time will ultimately tell. The number of deaths in New York State from COVID-19, as of June 6, 2020, was 28,170, according to the CDC. This figure is out of a total population of approximately 19.45 million, as of 2019. More than 75,800 New Yorkers perished as a result of the Spanish Flu of 1918–1919 out of a total population of approximately 9.11 million as of 1910 (Economic Effects of the 1918 Influenza Pandemic, 2007).

The challenge for high-tax states like New York is the economic impact of social distancing and the closing down of its economy for several months. Recent figures estimate the economic impact of the shutdown in New York to be significant. In late April 2020, Governor Andrew Cuomo said New York expects to see a drop in revenue of $13.3 billion because of COVID-19. We will eventually determine if New York’s approach was optimal or if it would have been wiser to take a more modest approach to social distancing, or something even less restrictive like Sweden’s approach, which never closed its economy. Based on all of the research I have done for this paper, social distancing does appear to work, but there are clear economic tradeoffs. I also believe that a big part of containing the spread of a pathogen comes back to individual responsibility. I agreed with New York Governor Andrew Cuomo when he remarked that wearing a face-covering in public settings in the COVID-19 era demonstrates respect for our fellow citizens.

The strategic importance of American corporations’ decoupling their supply chains from China remains front and center in the public debate today. I do not doubt that American companies, which boast some of the best minds in business worldwide, recognized this risk before it became a talking point in the press. Even if a high-tech firm identified this risk in 2016, one could only imagine the ensuing impact on a company if it announced plans to diversify away from China. Shareholders would undoubtedly ask management how the team intended to compete going forward with a higher cost basis, making such a move all but unrealistic at the time.

As Professor Shiller’s research shows, narratives can drive economic activity just as infectious pathogens can spread on a crowded New York subway car. Add to this a news media industry that is skilled at crafting headlines that generate clicks (in an almost addictive way) as well as a president such as Trump (who is his own media brand), and it becomes easy to see that competing narratives are seeking to define the economic enviornment swirling around COVID-19.

No one has a crystal ball to foretell where or when the economic impact of COVID-19 will abate worldwide or in the United States. History has shown that trade does indeed suffer following a pandemic. Given the current push, particularly in the United States, toward a domestication of industry, this historical trend is most likely to continue. If you are a believer in narrative economics, however, you know that even the most skilled craftsperson cannot, in the end, control the evolution of a narrative once it has begun, as Professor Shiller has noted.

All this reminds me of a telling quote from Peter Guber[1]: “Purposeful #storytelling isn’t show business, it’s good business.”

[1] Peter Gruber is the CEO of Mandalay Entertainment; co-owner and co-executive chairman of the Golden State Warriors; and owner of the Los Angeles Dodgers.

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Michael D. Herley