BOE's Haldane Says Thinking Outside the Box Can Fix Economicsby and
Chief economist says profession is ‘insular, self-referential’
Economy is a ‘kaleidoscope’ and needs new forms of analysis
Bank of England Chief Economist Andy Haldane says economics suffers from tunnel vision and there’s a need to bring new ideas to the profession to make it relevant again.
Haldane, whose speeches and papers have analyzed policy using everything from technology to biology, said his industry remains an “insular, self-referential discipline,” and this has to change.
“One of the potential failings of the economics profession is that it may have borrowed too little from other disciplines -- a methodological mono-culture,” he said in a speech on Thursday in Cambridge, England.
An issue that dogs current economic models is forecasting performance, he said, noting the failure to predict the financial crisis and, since then, IMF world growth projections that “consistently over-estimated” the recovery. It’s a timely point for BOE policy makers, who last week revised their projections for growth and inflation in the wake of Britain’s vote to leave the European Union.
Haldane said economists need to improve their understanding of the world because rapid changes in economies have social and political implications.
“It has been argued that these models were not designed to explain such extreme events” as the financial crisis, he said. “For me, this is not really a defense. If our models are silent about these events, this jeopardizes the very thing that makes economics interesting and economic policy important.”
In his speech, he cited economist George Shackle’s description of the economy as a “kaleidoscope, a collision of colors subject to on-going, rapid and radical change.” Haldane said agent-based models used in physics, chemistry and other sciences could enable a “fundamental changes in model dynamics.” Using it at the BOE has helped a better understanding of the housing market and the interaction of buyers, lenders and renters.
Contrasting ABM models with traditional micro-founded economic ones, Haldane said the big picture usually looks very different from the small one.
“Aggregating from the microscopic to the macroscopic is very unlikely to give sensible insights into real world behavior, for the same reason the behavior of a single neuron is uninformative about the threat of nuclear winter.”