Page 73 - Global Political Economy_Understanding The International Economic Order

CHA PTER T HREE
place, at least at that time, if the Arab-Israeli war hadnot occurred.
In addition, the ways in which different countries adjusted to the oil
shock andreturnedto equilibrium hadprofoundconsequences for
the worldeconomy. Whereas the UnitedStates respondedto the de-
flationary effects of the oil price rise with efforts to stimulate its econ-
omy, West Europeans were more concernedabout the inflationary
effects andrestrained their economies. Important policy conflicts re-
sultedfrom these differing responses, and the conflicting paths chosen
by the UnitedStates andother major economies contributedto insta-
bilities in the worldeconomy throughout the 1970s.
Economic analysis is a necessary ingredient in any effort to under-
stand the dynamics of the world economy; indeed, the comparative
statics analysis of the oil price rise is very useful. However, economics
provides only a partial explanation of the event and leaves out such
essential parts of the story as the war that triggeredit, the different
paths taken towardnew equilibria, andthe overall consequences for
the international economic andpolitical system. While it wouldbe
too much to expect the methodof comparative statics to take account
of these matters, the point is that economic analysis alone does not
substitute for historical, political, andsociological analysis.

Intellectual Limitations
As many economists themselves acknowledge, economics has a num-
ber of intellectual limitations that weaken both its claims to be an
exact science andits usefulness as an analytic tool. Perhaps most im-
portant of all, certain assumptions underlying economics are unrealis-
tic. For example, the central assumption of individual rationality has
21
frequently been demonstrated to be inaccurate. Nor is the assump-
tion that an economic actor has complete information always correct.
Andmarkets are frequently not the perfect competitive markets they
are assumedto be by conventional economic analysis. Even though
they have given considerable attention to these issues and have dealt
with them in various ways, economists still assume that such prob-
lems are exceptions rather than inherent limitations. Economists have
given increasedattention to the problem of uncertainty; yet there has
been a tendency to ignore the problem of uncertainty and/or to wish

21
An attack on the assumption of rationality is foundin the research of Daniel Kah-
neman. Consult his “New Challenges to the Rationality Assumption,” Journal of Insti-
tutional and Theoretical Economics 150, no. 1 (1994): 18–35.
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