This article first appeared in Forum, The Edge Malaysia Weekly on April 20, 2020 - April 26, 2020

Even as the world is fighting the Covid-19 pandemic, we need to start rethinking where and why we were blind to the impact of its emergence. We also need to know how to reopen the economy and get back to normal, or will there be no normality?

The behavioural economist Daniel Kahneman (Thinking, Fast and Slow, 2011) identified decision-making and judgement as fast heuristics (rules of thumb based on expertise or experience) or slow deliberations that demand longer attention as well as complex computations. This sounds simple but, actually, how you make decisions depends very much on the information that you have, the value systems that you believe in and your experience and theories that may help guide you in your judgement.

Fast intuitive decisions by experts look like magic but it takes more than 10,000 hours of practice and making mistakes to become an expert. For example, super-forecaster Philip Tetlock famously discovered in a 20-year study that in making predictions, the average political expert is “roughly as accurate as a dart-throwing chimpanzee”.

In decision-making, we always try to reduce complexity and uncertainty to simple decision rules. But as we shall see, even simple choices have complex alternatives and outcomes.

In any condition of uncertainty, the simplest choice is binary: to act or not to act. But as one of the pioneers of game theory, Nobel laureate Thomas Schelling, argued, decision-making is not independent of other actors. Most decisions are conditional decisions — I make a decision contingent on what I think my rival or others may do. In a time of peace, going with the majority is often the easiest. But in times of rivalry, taking a different decision may give the “out-of-the-box” entrepreneur a huge advantage. High risk but also high gain.

In a situation of uncertainty, we have essentially four options, what I call fight, flight, unite or do nothing.

Fighting means standing your ground and doing what is necessary to win. However, in the Thirty-Six Stratagems, a collection of maxims from ancient texts by Sun Tzu and other Chinese strategists, running away to fight another day is often considered a superior strategy.

Unite means working with others cooperatively to overcome the crisis or competition. The fourth option is very often the preferred action — doing nothing means waiting to see what happens and, sometimes, the problem actually goes away. Unfortunately, this time around, the coronavirus waits for no man — we do not have time on our side. Delay means more deaths and higher costs.

If China or the US were isolated nations, the simple answer is that each can make decisions independent of each other. But because there is geopolitical rivalry, each country is faced with a 2x2 matrix with an option also of doing nothing. But no decision is possible without an eye on what the other side is doing. The five choices are as follows: win-win; you win-I lose; I win-you lose; lose-lose; and do nothing.

Under the neoliberal free trade and markets ideology that underpinned Pax Americana, the simple mantra was always win-win. Notice that if the probabilities are equal between all five choices, win-win comes out only one-fifth of the time. Indeed, geopolitical rivalry and stalemate actually happen four-fifths of the time, which is exactly what is happening right now. America could promote win-win because it had an overwhelming technological, military and economic superiority over everyone else after World War II. President Donald Trump’s America First policy is the wake-up call that its superior exceptionalism is fading fast, so geopolitical rivalry is back on the agenda.

The one thing that the Covid-19 pandemic has shown with 2020 clarity is that the world has been pushed onto a lose-lose trajectory. The only concern in the geopolitical rivalry game is who ends up doing better (or loses less) when the pandemic ends. At the current rate of deaths and loss of gross domestic product, the North Atlantic economies are sustaining larger losses but the real fear is that the poorer developing countries will be devastated and end up with more fragile and failing states than before. China, the first to be hit, cannot recover if the rest of the world sinks.

In short, G20 cannot act together despite the common pandemic threat because everyone is watching for who will emerge at the top when the dust settles.

Schelling, who made his name thinking through game theory in the Cold War nuclear bomb age, was much more sceptical of the theory that markets make superior decisions that lead to equilibrium. In his book Micromotives and Macrobehavior (1978), he argues that “there is no presumption that the self-serving behaviour of individuals should usually lead to collectively satisfactory results”.

Indeed, stable equilibrium is a “special case” rather than normal, meaning that even out of very simple micro-decisions, the outcome could be chaotic or transitory into multiple equilibriums rather than a free market that reverts to stability after a shock. Schelling quite correctly points out that “things don’t work out optimally for a simple reason: there is no reason why they should. There is no mechanism that attunes individual responses to some collective accomplishment”.

This is exactly why governments appeared to correct market failures. And then there is also government failure.

The coronavirus is scary because it is a totally new virus that does not behave exactly like the SARS, HIV or Ebola viruses. To stop it, we have to learn from bitter experience that we have to practise social distancing and lockdowns, the sooner the better.

The US and Europe find that their just-in-time supply and income chains are not designed for prolonged lockdowns. The reason is that the system works on sustaining the tread mill of excess consumption through excess debt. Note how the US Federal Reserve and European Central Bank immediately dealt with the crisis through massive monetary creation, essentially putting more and more debt on their balance sheets.

Such central bank action is necessary to stop total collapse but it is not sustainable because if the livelihood income is broken, increasing debt will not keep these businesses and part-time workers alive. By buying more and more corporate paper and issuing guarantees, the debt burden is increasingly shifted from individuals and shareholders to the central banks’ books. That is nationalisation in everything but name.

Schelling is right. There will be no return to the old normal. Equilibrium was going anyway with the trade war. Technology was already changing the supply chains and business models. The pandemic only destroyed the old offline big mall business model faster as everyone shifts to online business. The only problem is that most policymakers do not have the data, or the understanding as to how, to make that transition without huge costs to jobs and businesses, at least in the short run, other than to run larger deficits.

The bottom line is that the advanced countries will run up huge sovereign debts that can only be borne by negative interest rates or future inflation. The poorer countries can try to borrow but will be constrained because there are real limits to their ability to issue debt. In short, it is the saver and the poor who will bear the brunt of the costs. No system is sustainable unless it is fairer to the saver, the worker and the poor.

The vaccine against the coronavirus will take 18 to 24 months to come to reality. We have some but not much time to figure out how the post-coronavirus world could be more resilient to the next pandemic or natural/human catastrophe. The real winners will be those who learn, adapt and innovate so that all of us emerge stronger. Those who are slow to acknowledge this fundamental change and not adapt will be the real losers.

Tan Sri Andrew Sheng writes on global issues from an Asian perspective

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