Part of the problem is just that the systems involved are so complex, of course -- the economy has complexified and the human brain has not kept up.
Another part of the problem, though, is that none of the traditional economic theories (neither the mathematical ones or the qualitative ones) embrace this complexity in principle.
I.e., the very fact of the increased complexity of the economy has direct implications, which seem to require introduction of new approaches for economic analysis.
One way to look at this is in terms of what I semi-seriously call "Nietzschean economics," where a more abstract notion of economic power replaces the traditional notion of money.
Put simply: it seems that the modern economy has somewhat obsoleted the concept of money, which has economists (and many others) confused...
For instance, China has a lot of US dollars right now, in principle ... but they can't really spend most of it, because if they traded their dollars for goods on the open international market, then the dollar would collapse in the international currency markets, the US economy would tank, demand for Chinese goods would collapse, and China would risk massive internal unrest etc.
It's not exactly that the Chinese government has money they can't use; but they have money that comes with severe restrictions on the ways it can be used. Having this money confers great economic power on them; but, this economic power can't necessarily be used in the traditional manner of buying stuff.
In general: with the world so interconnected, the notion of a unit of currency as being something that can be exchanged for a certain amount of stuff, anywhere, doesn't really apply...
More complexly, the same sorta phenomenon applies among and within investment banks and other financial institutions. E.g. a large bank holds some portfolio of financial instruments ... but if they sell a lot of one kind of instrument, this impacts the markets in a way that affects the value of the others, etc. So one can hardly assign each instrument they hold a value independently of the others.... The values of their various portfolio items are interdependent in the manner of a system of simultaneous nonlinear equations.
What this growing, rampant interdependence means is that the traditional concepts and tools of economics don't closely apply to the international biz/finance world anymore...
A lot of this was foreseen, on a qualitative level, in Galbraith's book "Economics and the Public Purpose" from the 1970s ... he talked about the "market economy" versus the "technostructure" and pointed out that the latter (being a complex of large corporations, governments and other institutions) follows quite different rules.
Well, now the nonlinear dynamics of the technostructure is running rampant -- but economists are still mainly studying it with tools designed for studying markets.
One step I think that needs to be taken, on the theory level, is to view actual buying power as Level 1 of a hierarchy of types of economic power. I'm thinking of:
- Level 1 = power to buy goods or services [right now, or at some future point(s) in time]
- Level 2 = power to influence others' Level 1 power
- Level 3 = power to influence others' Level 2 power
- .. etc. ...
The ultimate extreme of all this of course would be
- Level infinity = power to influence others' Level infinity power
which was basically Nietzsche's view of the driving force of the universe ... and I do think that international economics and politics boils down to this sometimes: power for it's own sake, rather than being tied to ultimately influencing the acquisition of goods and services.
Traditional economics is based on the notion that everything boils down to buying power ... but in a world where no one is smart enough to calculate what their decisions will imply in terms of buying power, this sort of economics seems to have limited applicability...
What we need is a nice, elegant, pragmatically applicable theory of the nonlinear dynamics of Level k economic power under conditions where
- the computational complexity of recognizing important high-level patterns in an economy
- the computational capability of even the smartest individual participants in the economy
This might be a fun thing to work on, but I've got a thinking machine to build, so hopefully somebody else will do it ... or we'll have to wait for the AI to solve the problem. (Of course, an appropriately constructed AI could also palliate the problem, due to having increased capability to recognize economic patterns, either due to possessing greater-than-human general intelligence, or due to combining human-level general intelligence with specialized capabilities for economic analysis.)