Theory of Shocks About States in Static and Dynamic Economics

The place of the state in the theory of shocks is predetermined by the increasing importance of the subjective component of the processes of self-movement of systemic integrities. The main problem is that the state formalizes the actions of subjects as economic agents, abstracting from social conditions that generate the individual values of a person implemented in the economy. So, the economic subject acquires its own individual values in a society with a sharp polarization of citizens' incomes, inequality of opportunities, a shrinking middle class, and an ineffective public healthcare system, as demonstrated by the coronavirus pandemic. As a result, a fundamental problem arises of the discrepancy between society and economy as well as formal and informal institutions that predetermine the opportunistic behavior of the economic subjects. Thus, the state persistently strives for financial stability in the economy, abstracting from the problems of social disunity.

COVID-19 Shock and Schumpeterian “Creative Destruction”

The COVID-19 pandemic shock pushed the objective processes of discontinuity in the evolution of a static economy. The new path of self-development of the economy in its dynamic state starts with transferring system to the basis of the Industrial Revolution 4.0. In this connection, the fundamental question arises related to what structure will be the main driver of the future dynamic processes. In this regard, the idea of J. Schumpeter about the entrepreneurs' ability to carry out “creative destruction” becomes highly relevant. It is about private business capable of self-regulation as well as building post-coronavirus systemic integrities both in the technological sphere, in society and economy. It is about their forced by COVID-19 understanding of the main factor of their success, associated with the employees and their potential which is largely formed in society and used in firms if they construct their internal organization on the principles of human centrism.

Shocks in the Economic Systems' Self-Organization

The logic of understanding the phenomenon of shocks predetermines the need to deepen the understanding of the embeddedness into the mechanism of self-organization of the economic system under the influence of dialectical laws of unity and struggle of opposites and of the transition of quantitative changes to qualitative ones. Shocks are called to mediate the action of the dialectical laws realizing the possibility of systems' further self-movement. If the mechanisms of positive and negative selection failed to promptly “reject” the structural links that destroy the system's integrity, shocks perform this function at the turning points of dialectical laws. All stages of crises following shocks are aimed at restoring the existing structure by destroying unemployed links, restoring the “working” structural ties, and forming new links instead of the destroyed ones. At the end of the crises, hypothetically, the system should restore its integrity.

Shocks and Operation of the Law of Denial of Negation

The long history of complication of static economy objectively leads it to exhaustion of self-organization potential and to the point of no return – a leap into dynamic state with self-development mechanism. In the new quality, the dynamic economy is regulated by the dialectical law of negation of negation with new functions of shocks in its operation. As for self-organizing systems, shocks are determined to destroy the structural links that weaken systemic integrity. In order, the static system could jump into a dynamic state, shocks realize the first negation, destroying the vertical hierarchy of structural links, and as for the second negation, shocks destroy basic structural level as well. The epochal task is associated with construction of new dynamic systemic integrity on the modern technological base by forming new structure since the previous structural hierarchy has been completely destroyed by shocks embedded into the dialectical law of double negation.

Shocks vs. Impulse-Propagation Model of Economic Dynamics

Ragnar Frisch, the Nobel prizer in economics, drew attention to two phenomena: propagation problems and impulse problems in dynamic economics. His deep scientific contribution relates to the interpretation of business cycle transformed under the influence of impulses (shocks). But some terminological misunderstandings arose. One of them forced the authors to focus on the phenomenon of systems' self-movement: their self-organization in statics and their self-development in dynamics. Another one relates to exogenous nature of impulses (shocks) that forced the authors to prove the endogenous embeddedness of shocks into the mechanisms of dialectical laws implementation. Eugen Slutsky demonstrated the stochastic approach as to random fluctuations as a source of cyclical processes in the economy. The confusion in the concepts of cycles and waves predetermines the need to create a wave theory of systemic self-organization (Chapter 2). Modern shocks theory develops a new approach which makes it possible to eliminate misconceptions of past theories.

The State and the Construction of the Post-COVID-19 Future

The final chapter is the normative part of the shocks' theory, which defines the functions of the state in a dynamic economy. The process and object components of systemic integrity in economy are quite objectively regulated by the mechanisms of positive and negative selection of organizational forms and by three dialectical laws with shocks at their turning points. The subjective component of self-movement processes is governed by the state and its functions. If the structures of a static economy have been destroyed, the dynamic system's new structures must be created. The institutionalization of structures creation for dynamic systems is imputed to the state. It is about education and health of the critical mass of people as creators, about their adequate socialization in the society where people are “free, since they realize the need for it,” about the institutionalization of self-sufficient companies' activities capable to form human-centric organizations through upwards and downwards causation mechanisms.

Methodological Approach to the Interpretation of the Essence of Shocks and Forms of Their Manifestation

Research methodology of shocks is based on the dialectic of interaction of such categories as system, structure, integrity, exchange, as well as two main forms of organizing economic activity – its specialization and cooperation. The dialectic of interaction of differentiation and integration with the exchange of economic activity and its results makes it possible to highlight the structure of the system. Structural connections are formed through the exchange and predetermine the system's integrity. Thus, if shocks have a strong negative impact on the system, they apparently violate its integrity and, consequently, its structure. Outwardly, shocks manifest as a marginal gap between market and base prices of traded goods, services, or any other assets. Structural disruptions are mediated by either sellers or buyers in the marketplace. The authors formulate a hypothesis about the embeddedness of shocks in the mechanism of self-movement of system.

The Institutional Component of the Shock's Mechanism

In all objective processes of self-movement of systems, the subjective aspect associated with a person as a thinking creature is seen. This introduces a fundamental aspect of being aware of the actions of a creative person, who should feel freedom as a perceived necessity. So, society and its integrity come to the fore, which will predetermine the dialectic of interaction with the economy. It is this aspect of the state's activity that will make its way through a long thorny path, since it is preceded by the experience of the government in a capital-centric economy with the economic measure of all its successes. And the formation of a human-centric organization is a completely new sphere of nation states' activity. In these conditions, the state should be responsible for ensuring the integrity of systems, or rather for the institutionalization of their dialectical interaction and their adequate self-structuring in all spheres.

COVID-19 Shock and Subsequent Crisis

The COVID-19 pandemic has wreaked havoc on national socioeconomic systems, causing the deepest economic downturn since the Great Depression. The rapid spread of coronavirus infection around the world revealed the absolute unpreparedness of national health systems to block fatal disease. The COVID-19 shock revealed a phenomenal paradox: an economy focused on meeting the needs of people, subordinated their desires, value orientations to economic goals. Macroeconomic equilibrium and financial stability have become publicly recognized social priorities, which violated the dialectic of society and the economy interaction. The post-shock societal crisis raised fundamental questions of what kind of society was built and what post-coronavirus reality should be. Following the shocks' theory findings, the contours of uncertain post-COVID future will be associated with new technological paradigm of the self-developing economy and society, the restoration of social integrity as a basis of constructing future economy, and the replacement of capital-centrism by human-centrism in all organizational structures.

Nation State and Fighting the COVID-19 Pandemic Shock

Nation states have taken the brunt of the fight against the COVID-19 pandemic. The effectiveness of their actions was assessed by all the society in terms of growth rates of infected and deaths, of ability to quickly mobilize all medical services to work in extreme conditions, to increase the capacity of hospitals, of additional medical equipment, of laboratories' capacities and the availability of tests for COVID-19, not to mention the research the vaccine or effective means of treating the disease, etc. In addition, they introduced extreme regimes of lockdowns, having blocked the economy and social interconnections and given rise to an acute problem of the disadvantaged citizens' survival. The great question arose of who should have taken responsibility for missed opportunities. It is unreasonable to blame only the state because it has no alternative today. It is the weakest “link” in the structural “chain” of national societies, but by strengthening it, the entire chain becomes stronger to prevent future disasters.