Tuesday, 16 September 2008


It is very interesting to see how the narrative about the current crisis, which in my view is clearly a global one, stays on the national level. This is true for the policy makers, the media, as well as the investment banking chatter. Part of the reason is that the institutions that could do something about it are on the national level, such as central banks, treasuries, as well as regulatory bodies. However, that is perhaps the problem: current regulation, monetary and most of the fiscal policies operate on the national level. And not only the legitimacy and the mandate come from local rather than global entities, but the intellectual focus, the data, and the models stay there too.

As a consequence, we tend to overemphasize the national at the expense of learning about the global. While things were looking bright, prices tended to go up, and risk aversion was at historical lows, this did not matter. It was only a few scarecrows scratching their heads. Now, amidst the crisis, this limitation might impede effective intervention.

It seems that although there is a general recognition about ‘new economy’ and ‘globalisation’, the economics profession, as one, comes to terms with the new reality with a considerable lag. Thus, we keep discussing localised effects, either in geographic or in sectoral sense, rather than getting down to dealing with it on the global level. In the old times, when, say, a national economy recession took place, the economics profession did not have separate solutions for only part of the country, or a few sectors. The entire economic system was modeled, with the sub-national regional or sectoral dynamics making the analysis more refined, but only as part of the overall model or policy.

Now, it's as if we only focused on parts of the global economy, trying to figure out the dynamics of only that part, while ignoring the rest. If the global economy really is a system, this is not very likely to work.


  1. A comment about 'context' sent to me by email, from my friend Neil Lovell (copied here with permission):

    “What I've been really fascinated by in the past few days has been the sudden rediscovery of context. Historical context, global context, the lot. It's as if everyone has suddenly woken up from some kind of blinkered [..] haze where only today (i.e. RIGHT HERE, RIGHT NOW) matters and realised that - [..] yesterday did actually matter, didn't it?! And tomorrow is actually going to matter as well! As if that were some kind of revelation.”

  2. There is a short interview with Oliver Blanchard, the new IMF chief economist about the role of the IMF. Talk about limited aspirations...