Hysteresis – Why Things Don’t Go Back To Normal
With a vaccine roll-out underway , we are all looking forward to things “getting back to normal” as soon as possible. Optimists seem to be betting on normality resuming by Summer 2021, pessimists see the beginning of 2022 as a more dependable planning horizon.
But what does getting back to normal look like? There seem two very different answers to this question, depending on who you ask. Some argue that the pandemic has fundamentally changed how we live our lives – for better and worse – and that these new attitudes and behaviors are now so ingrained that we aren’t going back. Others see these new behaviors as temporary adjustments to a one-off shock, and predict a wholesale reversion to type as soon as the shock is over. They point out that people regained their appetite for flying within months of the 9/11 attacks, while bankers quickly recovered their enthusiasm for profits and bonuses after the global financial crisis.
I would usually lean towards the latter argument. Human nature may not be hardwired, but it evolves extremely slowly. Our basic social and psychological needs haven’t changed. Maslow’s hierarchy seems as valid today as ever. And yet despite this, I suspect there will be quite a lot of things that don’t get back to normal, even after Covid-19 is largely behind us.
My reasoning is based on the notion of hysteresis, first developed in physics and then taken up by economists. It basically means that the impact of a change on a system cannot just be reversed by taking away the force you applied in the first place. For example, when the external magnetic field applied to a piece of iron is removed, the iron remains at least partially magnetized. The system doesn’t just bounce back after a shock – there is an enduring and sometimes even permanent change.
So what are the causes of hysteresis? What factors might prevent things going back to normal? I suggest we consider four areas.
The economists who first used the term hysteresis observed that even after recovering from a major recession, the unemployment rate was typically higher than before the recession. This long-term ‘scarring’ effect was thought to be caused by a variety of factors, such as loss of skills, reluctance to invest, and adjustment costs in rebuilding.
In today’s economy, the risks of structural hysteresis are clear. If retailers, hospitality and travel companies are allowed to go bankrupt, the costs of rebuilding will be huge and the impact on communities will be long-lasting. This is of course why governments are spending a fortune on furlough and loan schemes to keep such businesses going. But even with these generous schemes, not every business will survive – we have already seen many high profile casualties such as Debenhams and Arcadia in the UK, and Neiman Marcus and JC Penney in the US. Hysteresis can be reduced, but not eliminated: the high street of shops and restaurants is going to look quite different a few years from now.
One interesting point about structural adjustment costs is the resilience of platform businesses like Uber, Deliveroo and Airbnb. They have been widely criticized for not providing job security to their workers, but by virtue of their low fixed-cost business model they are highly resilient to an external shock, because they can flex their capacity up and down at a moment’s notice. They provide a buffer against hysteresis. Of course, governments still need to support unemployed workers when demand dries up, but the costs of bankruptcy and restructuring can largely be avoided.
Changes in consumer behavior
There have been obvious changes in consumer behavior since the pandemic started, and while some are clearly temporary (I don’t want to meet my friends for a drink over Zoom – I want to go to the pub) others are likely to endure because they are efficient (online shopping) and/or enjoyable (movie streaming).
Of course these changes are part of the broader digital revolution that has been underway for twenty years, and it is rightly argued that the pandemic accelerated the adoption of new behaviors around purchase and consumption. But its worth underlining that the impetus for these new behaviors came mostly from the supply-side of the market. For example, universities had always insisted on in-class learning, and estate agents had required in-person viewings before selling a property, but they quickly figured out online alternatives as a means of staying afloat. But the chances are they won’t be able to reverse these new ways of working post-pandemic, even if they wanted to. The cat is out of the bag. It seems likely we will end up in some sort of physical-digital hybrid world in many sectors. For example, university students can look forward to getting more of their basic classes online, with advanced classes, tutorials and practical sessions face-to-face.
Changes in workplace behavior
The wholesale shift to virtual working for formerly office-based employees was no less dramatic, and was also driven by necessity rather than expectation or demand. We now have a good understanding of how effective this huge social experiment has been. Most of us are at least as productive as before, our ability to get things done, especially tasks than can be easily subdivided, has improved, and opportunities for online learning are plentiful. On the other hand, creativity and collaboration are being stifled, resolving tricky personnel issues is more difficult, and the opportunities for professional development – for example taking on challenging new assignments – are fewer than before.
While a few companies have pledged to allow virtual working to continue post-pandemic, most are gearing up for a hybrid model, with people working from home maybe half the time, and careful consideration being given to getting the most out of their time together in the office. There is a clear hysteresis effect here, though driven more by an efficiency imperative than by the needs or desires of workers.
But the knock-on effects for the economy are huge. If the commuting levels in major cities like London fall by 20-30% post-pandemic, the impact on commercial real estate, fast-food chains and pubs, train services, indeed the whole paraphernalia of services that proliferate in major city centers will need re-evaluating. Looking across all the long-term effects of the pandemic on society, this may end up being the most significant.
Government rules and regulations
Finally, how will government rules and regulations change things post-pandemic? As already noted, the government’s first economic (rather than health-related) task was keeping the whole system from collapse, and as soon as that is resolved, their next task will be to find ways to pay for their interventions – which will mean higher taxes and tighter public spending for years to come.
But there are other likely areas of government intervention that will hinder a return to normal. One will be a reluctance to relax the new rules. Just as the pilot doesn’t turn off the “fasten seatbelt” sign until the turbulence is long gone, we can expect the strict rules on social distancing and travel to endure for months or even years after the danger has passed.
There are also signs of governments using the pandemic as a window of opportunity, to bring in new regulations that might have otherwise encountered resistance. Cities such as Paris and Madrid have built new cycle routes, Athens is carving out new public spaces where cars used to flow. The dramatic reduction in energy usage during the pandemic has emboldened the EU, among others, to set ambitious targets for emission reductions.
By the same token, we might also see new policy interventions in some sectors. The competition authorities were circling Google, Facebook, Amazon and Apple even before the pandemic put them in more dominant positions. The pressure for policy activism will increase, especially in Europe. Digital services taxes and anti-trust cases are on the way.
So what will the next few years be like? Basic human nature hasn’t changed, so we will revert to most of the activities and behaviors that kept us busy before the pandemic. But with two important differences.
First, there will be more constraints on how we live. After 9/11 we flew just as much as before, but security was stricter. After the SARS epidemic, people in Asian countries became accustomed to mask-wearing and more health-checks. After the global financial crisis, banks quickly got back into their groove, but with vastly more regulations and government oversight. We don’t know exactly how this will play out, but we can expect greater government involvement in our day-to-day lives than before.
Second, the digital revolution just got a turbo boost. Any resistance to change dissolved in a few short weeks back in March, and the potential benefits of doing things digitally became apparent. And these changes will stay with us. The initial effect will be a myriad of small adjustments to our daily lives – shopping, paying, learning, interacting – where we shift to digital by default. But there will also be a knock-on effect on cities, airlines, and hospitality services, as they adjust to the consequences of workers spending more time in their home offices.
When times are tough, it’s only natural to wish for a return to normality. But we live in a complex and interdependent world, so nothing is ever quite the same as before, even after the storm has passed. What exactly the new normal will look like is uncertain, but the concept of hysteresis at least gives us a way forward. It highlights when the effect of applying and then removing pressure is asymmetrical, and it clarifies that some of the changes we have had to make are actually beneficial, and should not be reversed.
Julian Birkinshaw is Professor of Strategy and Entrepreneurship and Deputy Dean at the London Business School. He is a Fellow of the British Academy (FBA), the Academy of Social Scientists (FAcSS) and the Academy of International Business.