The Greeks had a word for it ‘:aporia‘. That state of ignorance and confusion you are condemned to pass through before you can entertain even the vaguest hope of achieving clarity and real knowledge. Well, taking a long hard look at what we know, what we think we know, and what we know we don’t understand for sure, I would say that this expression gives us a working definition of where economic science may be right now: in a state of ‘aporeia’.
Essentially we are in the frustrating condition of repeatedly finding that what is taught in the textbooks, and what we are encountering ‘out there in reality’, don’t make easy bedfellows. Above all it is China that has caused most of the head scratching. Morgan Stanley’s Andy Xie may have started it off by having the guts to come out and urge us to: “throw away the textbooks”, later an influential paper by Dooley Falkerts-Landau and Garber argued that conventional macro was all at sea when looking at goods and financial flows between China and the US. Today it is the turn of Robert Samuelson to say toss the textbook.
Andy Xie drew people’s attention to the fact that most macro textbooks start with the idea of a small open economy, and build out. Xie’s point was that in the globalised world we have today we may be methodologically better off treating the whole global economy as *one single developing economy* with imperfections which arise due to the existence of nation states.
Dooley et al make a slightly different point:
“(The) growing chasm between what we know ought to be and what is can be bes summarized (by the relation between) 10-TIPS yields and the US current account balance. The long term real interest rate has been falling as the current account deficit has been growing into historically uncharted territory. Our standard theory of open economy macroeconomics been wildly wrong for five years. The data indicate that it is likely to be wrong for years more. Of course, some day the imbalances will be reduced, allowing us to resume teaching the standard stuff with some increase in confidence.”
In this uncharted water all of us have our own personal hitlists to bring forward. My own would be headed by the fact that most economics majors never do even a single course in demography, and by the fact that the relation between population and economic growth is normally only taught in the context of developing economies. Then again there is the notorious Harrod-Samuelson-Balassa effect. Even the ‘well known’ Feldstein-Horioka effect is normally justified from data which at its most recent comes from the late 90’s, with the possible implication that much of the data may now have been ‘superceded’ by a reality reeling under the impact of the rapid pace which globalisation has assumed in that handful of years which now constitute our ‘new’ century.
Samuelson’s own particular preoccupations? Well they’re mainly related to the current US connundrum, but the reach of their implications is much wider.
“It’s not merely that we’re in the midst of changes (China and India’s entry into the global economy, the explosion of U.S. trade deficits) that are unfamiliar and, to some extent, unprecedented. What’s equally significant is that many assumptions that economists once casually accepted and taught are now suspect or discredited. Let m give you three examples.