From the start, a major question has been whether economists could have and should have foreseen this shock. Other questions include which institutional changes might prevent such shocks from happening again, and how to account for these shocks in economic theory.
It is in this light that Pedro Duarte and Kevin Hoover’s recent paper “Observing Shocks” reads as a first exploration of a new research agenda. In the paper, Duarte and Hoover discuss the history of the understanding and use of shocks in economic theory, which to a large extent, and quite surprisingly, goes back only to the mid 1970s. Besides providing a rich intellectual history of relevant economic theory, their main claim is that with regard to shocks the more or less standard distinction in the philosophy of the natural sciences between observable data and inferred, constructed - and hence by nature unobservable - phenomena is at least up for discussion in the case of economics and shocks.
That reason, however, that in all its detailed history and argumentation the paper most of all reads as the first salute of a new research program, is the number of questions it draws attention to. From a philosophy of science point of view we might ask: so what do - or could - we mean by observation and observable in economics? And does the problematic nature of observation in economics also renders the data-phenomenan dichotomy obsolete? More immediate from an economic perspective, not in the least with the recent crises in the back of our minds, are matters such as: How coincidental is the emergence of the modern theory of shocks in (macro)econometrics since 1973? We know of the big shock in that year, but is the steep increase in shock-research in economics since then a reflection of an increasing occurrence of shocks in the past forty years? And how exactly should we fit the common economic distinction between exogeneity en endogeneity into the story? It emerges briefly here and there, but are economic discussions on shocks not also discussions about finding the right arguments to leave certain phenomena out of economic theories and models? And finally, how do economists understand shocks deep down? Are they, as Frish suggested, the result of an error of human behavior, or do they constitute a fundamental part of the economy? I’m inclined to think the latter if shocks are integrated in probability-of-occurrence terms, but that does not seem to fit the rational expectations traditions.
So anyway, dear Pedro and Kevin, can we expect more?