There’s an ingenious little book out there which you might have read but more likely not—Flatland. It’s a description of a two-dimensional world as seen by one of its two-dimensional inhabitants, then a one-dimensional world as seen by a two-dimensional traveller, and, finally, the three-dimensional world as seen by our two-dimensional traveller.
I think there’s a similar work to be written about economics. In it our narrator would write about the workings of a global economy as seen by a person who can only imagine a localized, isolated economy, possibly called “Islandia”. Alternatively, it might be enough to read the editorials in The Economist, the Wall Street Journal, the pronouncements of the Federal Reserve governors, or the policy prescriptions of our politicians.
I think we’re now living in a largely globalized economy and haven’t completely appreciated its implications. The fiscal and monetary tools that we’ve used no longer work but people are behaving as though they still did.
Just as an example, David Ricardo’s theory of trade does not envision a world in which the factors of production are largely portable but that’s the world in which we live. In such a world comparative advantage no longer has the implications it once had. And yet we behave as though it did.
