Sunday, July 19, 2015

All knowledge is contingent - Euro style

I often mention that all knowledge is contingent by which I mean that whatever we know, and whatever we may passionately believe to be true, is contingent on yet further information that may prove that belief to be either wrong or more limited in scope than we thought. The world was obviously flat until it was obviously round.

Who Predicted the Eurozone Crisis? by David Beckworth provides a great example of passionate belief, arising from theoretical constructs, in a real-world policy being upended by new information. Beckworth is disputing a contention that only nine economists predicted that the Eurozone would ultimately fail. He is right, there were hundreds that made that argument in the nineties and earlier.

What caught my eye was research he cites from 2010, It Can’t Happen, It’s a Bad Idea, It Won’t Last: U.S. Economists on the EMU and the Euro, 1989-2002 by Lars Jonung and Eoin Drea. Jonung and Drea are making the argument that the success of the Euro and European Union discredits the skepticism and quality of argument of the American economists.
The main finding of our survey is that US academic economists were mostly skeptical of the single currency in the 1990s. By now, the euro has existed for more than a decade. The pessimistic forecasts and scenarios of the U.S. academic economists in the 1990s have not materialized. The euro is well established. It has not created political turmoil in Europe, and it has fostered integration of financial, labor and commodity markets within the euro area. Trade within the euro area has increased, and so has business cycle synchronization. Inflation differentials within the euro area are presently of the same order of magnitude as in the United States.

Why were U.S. economists so skeptical towards European monetary integration prior to the physical existence of the euro?
As Beckworth notes,
Ironically, the article was published in early 2010 just as the Eurozone crisis was unfolding.
Jonung and Drea are victims of the reality that all knowledge is contingent. At the point in time of 2010, it appeared to them that the success of the Eurozone had emasculated the arguments of the American skeptics. Five years later, most of the concerns expressed by the Americans have come to fruition. Their skepticism was actually well-founded and turned out to be right. Whether and how the Eurozone is saved remains to be seen but it is no longer possible to dismiss the concerns that had been raised in advance of the plan.

Knowing that all knowledge is contingent makes it no easier to remain cautious and humble. Some knowledge just seems so obvious that only the most foolish could possibly question it. And then the world serves up a steaming pile of humility by showing us to have been the dupes in the first place.

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