Life After Covid-19 and the Theory of Punctuated Equilibrium
When we first started experiencing market complications due to Covid-19 in late February, I never thought things would quite turn out the way they have. I wrote about how I felt the markets would come back once things got back on track and once we realized our fears were a bit over-blown. Later, when the nation went into quarantine, again, I thought that all of this was a blip and we’d return to normal in due course.
Now, as May approaches and we learn more about the virus, I have to admit that what I previously believed was a bit off. I don’t want anyone who may read this to think that I feel our economy and markets will collapse or anything devastating like that; however, I do believe things will not be able to return to normal as we once believed normal to be. I can’t predict what the future will look like, and I certainly cannot predict what that means for the markets or investments.
Science has a theory known as Punctuated Equilibrium. I first learned the term while working on a PhD in Political Science, however, this theory applies to other scientific fields as well, like evolutionary biology. I want to focus on the theory as it relates to society and what we are going through with the virus. The basic concept in political science is that the political landscape sits relatively stable over time, with only minor changes to public policy, but then some event happens, technology comes along, or some other force enters the situation to force a dramatic change. From that point forward, there is a new stable equilibrium until the next event forces dramatic change once again.
Its easy to think back at wars and revolutions as being these punctuated events that forever change the way we think about normalcy. There was a definite way the world worked before the American Revolution, and then after. Same for the American Civil War, World War II, and to some extent even the most recent war on terror which can arguably have been punctuated by the events on 9/11. Thinking less about war, and more about the economy and markets, the great recession of 2008/09 is another point of demarcation. Prior to the market collapse brought on by the abuse of derivative securities, it was almost unheard of for our government to have been so involved in bailing out our economic system. Then it wasn’t so unusual. They spent trillions of dollars and took equity stakes in companies like General Motors and Chrysler (not the first time we had to bailout Chrysler,) and now, we don’t even bat an eye when our government spends over $2 trillion to protect our economy. I’m not advocating whether any of this was good or bad, I’m just pointing out that a crisis happened and normalcy changed. I remember very vividly the discussions as to if, in 2008, the government should get involved or simply let the system correct itself, but now, we don’t have those conversations and a $2.2 trillion bill gets passed in a relatively short period of time, with debate only being over what is included and not if it should be done at all. I believe that when Rahm Emanuel said that you don’t let a crisis go to waste, he was specifically referring to this theory.
What then does this mean for the current crisis? That is certainly up for debate. We’ve heard members of congress say that they want to take this opportunity to transform our economy, our government, and ultimately our way of life, so we know they are considering that this event will be particularly transformative. Only time will tell us what things will be like on the other side of the punctuation.
One thing I do know for certain is that we will adapt. Humans adapt, and Americans adapt quite well. Regardless of the event, from revolutions, wars, civil unrest, to natural and man-made disasters, we have adapted, changed, and overcome. Life continues and even though our past normal is gone, we will adjust to a new normal and we should all thank God for giving us that ability.