If you have not heard of Ebola, you must have been living under a rock for the past few weeks- although that might be the safest place to be, as you are nearly guaranteed not to contract the virus there. Thought to have originated from fruit bats, Ebola was quickly transmitted to other primates through blood and bodily fluids, and ultimately reached humans. A particularly gruesome virus, its symptoms include flulike features, vomiting, diarrhea, abdominal and chest pain, epidermal rashes, and both internal and external bleeding. What was once thought to be an outbreak contained in the countries of Guinea, Liberia, and Sierra Leone has now expanded worldwide: people returning from West Africa have been diagnosed in places as far as Spain and America. Many of my pre-med friends attempt to distinguish their future occupations from that of business and finance majors, but Ebola has highlighted the interconnected nature of both. What occurs in the sphere of global health is directly related to the state of the global economy.
Once news of Ebola and its severity got out, people became extremely nervous about visiting the regions where it was especially rampant. In response, they canceled their flights to the affected areas-similar to the ubiquitous response this past summer to the war in Israel. Such a reaction is especially impactful in these countries, as they depend on tourist spending as a major source of their revenue stream. Moreover, international spending in these countries immediately plummeted. Nations worldwide rationalized that the risk of contracting Ebola far outweighed the benefit of conducting trade with these relatively insignificant economic players.
The mindset of choosing not to spend quickly pervaded economies worldwide. While the lack of spending in one economy may indicate that consumers have money to spend elsewhere, the reality is that the issue is one with a deep psychological basis. Seeing instability elsewhere leads to a drop in consumer confidence. People worry about the state of the world, and are more cautious in their spending habits. This makes sense when juxtaposed with the opposite scenario: when business is booming and there is no violence, people consume more. Thus, even though West African countries contribute little to the global GDP, the concern over consumption continues to manifest itself worldwide.
Consumer confidence also has an impact on stock prices. As with general spending, people grow nervous regarding the fate of many corporations; the instability in West Africa might affect production and/or profits. In that respect, shaky consumer confidence in global markets can ultimately be a self-fulfilling prophecy. In response to the perceived riskiness of stocks, many invest in bonds, as they are perceived to be less volatile as well as a more secure investment.
While stock prices might decrease in general, there are exceptions. Clairvoyant investors realize that the value of companies that provide medical related goods and services will appreciate because demand will skyrocket. Indeed, this was true for Lakeland Industries, a producer of Hazmat suits, who witnessed a 40% surge in its share price in the past few months. Other medical related companies that one might not associate with generating large profits have similarly done extraordinarily well in the wake of the Ebola outbreak. An interesting point to note is that demand, for the most part, is only for brand name, and not generic, goods. In treating a fatal disease, buyers put little focus on cost. This is counter to the basis of economics, in which models prove that people will buy more of the cheaper option. Here, concerned citizens and governments are willing to err on the side of overspending rather than risking lives.
The medical community realizes that it bears responsibility for treating Ebola. In particular, the pharmaceutical industry is at the forefront, and is making strides in finding a cure. Pharmaceutical companies are furiously conducting laboratory tests in order to quickly find the cure-or, more accurately, be the first ones to find it. The concept of conducting research and discovering innovation is actually central to a core concept in macroeconomics that is described in the Romer Model. In short, the model shows that the labor market is split into two: those that produce output and those that generate ideas and innovation. Ideas are considered non-rival goods, meaning that one’s use of it does not diminish another’s use. A stock of ideas accumulate over time and contribute to long run economic growth. Society ultimately benefits from the discovery of new ideas, and in our case twofold: one from the discovery of new knowledge, and second by curing sick patients.
A major shortcoming in having to conduct so much research before finding a cure for Ebola is the exorbitant cost it entails. The trials, materials, processes, and labor cost a fortune. In perfect competition, once the cure is discovered and the drug is manufactured, the marginal cost will equal marginal revenue-in short, there is zero economic profit! In the world of business, where corporate profits reign, how can we expect pharmaceutical companies to invest so much money in a cause when they are only going to lose money by doing so? Moreover, a cure (which is inherently an idea) is a non-rival good, and therefore can be used by one person without diminishing the use of another. As a result, there is nothing stopping a company from stealing the idea without having spent a dime on research. So if not international prestige, why do we still see companies racing to find the cure for Ebola?
There are many barriers in place to make it financially worthwhile for companies to find a cure for Ebola. One example is a patent, which allows for the creator of a good to have exclusive rights for 20 years. As a result, the creator has a monopoly over the good, and can effectively charge (almost) any price he wishes. This serves to both offset the price of research that goes into the discovery and to reward the creator for his innovation. Pharmaceutical companies are notorious for exploiting these patents by charging exorbitant amounts per pill. They generate sky-high profit margins; it costs pennies to manufacture a pill, but they charge thousands of dollars per pill. Unfortunately, this comes at the expense of social welfare, a field known as welfare economics. This will especially hold true with Ebola patients, many of whom live in third world countries and cannot afford to pay such astronomical prices. Once a cure is found, many will still be forced to suffer, with the mere existence of a cure taunting them.
In order to prevent this from happening, the government often provides subsidies to buttress the high costs of research. In the short run, this actually hurts productivity of output since fewer people are producing, and more are conducting research. In the long run, though, as the Romer Model shows, society ultimately benefits from the increased stock of ideas.
Ebola is a terrible disease that must be eradicated. From a medical perspective, it is horrible because it kills innocent victims. From an economic point of view, it decreases the labor supply, limits productivity, and superficially bloats certain aspects of the market. While it is interesting that a disease can serve to highlight many economic phenomena, I would much rather be able to apply these concepts to something positive.