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The Bank of England’s chief economist, Andy Haldane, recently criticised his very own profession. This led to a bout of soul searching for economists as we face, again, the familiar criticism that nobody predicted the 2008 financial crisis (in fact, some economists did) and reflect on whether the subject is being taught properly at school and university.
Yet Haldane’s criticisms are less severe than they might first
appear. Indeed they remain largely innocuous at the level of economic
prediction. Andy Haldane.Niccolò Caranti
To his credit, Haldane made some effort to highlight more deep-seated problems in economics.
These problems relate to issues of theory and method. They are also
related to an unwillingness to allow dissent within economics and to
open up to other disciplines.
Unwittingly, however, he distracts attention away from these problems
by focusing on the issue of forecasting and misses the opportunity to
ram home the point that economics is flawed in a fundamental sense.
Better forecasts cannot exonerate economics from its failings now and in
the past.
Weak and off-target
Economics should be in crisis. But in reality it is not.
Rather, economics remains largely the same as it was before the
financial crisis – in effect, it remains just as problematic now as in
the past. This is an issue not just for economics but for society as a
whole, given the enduring power and influence of the discipline on policy and public life.
To think of economics in terms of forecasting is to limit its nature
and scope. Economics ought to be about explanation. It should be able to
make sense of the world beyond forecasts of the future. It is not clear
that as it exists now, economics is able to understand the world in its
present form. To this extent, it cannot help understand the frequency
and depth of crises.
Economists remain committed to a particular approach to theory building in which mathematical models are all that count.
They are often too abstract to be tested and exist as formal
abstractions with no connection to the real world. For example, some
macroeconomic models before the crisis were so out of touch with reality
they excluded the existence of banks. No wonder the crisis came as a
surprise.
As things stand, there is little chance that economics will open up
to the ideas and methods of other disciplines. Instead, the discipline
has embraced a project of “economic imperialism” seeking to colonise other social sciences. Genuine interdisciplinary debate has lost out in this process.
Haldane’s criticisms of economics, therefore, remain weak and off
target. He calls for economics to learn from meteorology. That way it
can improve its forecasts. What he misses is the need for radical change
at the level of theory and method. He misses the need for economics to
embrace reform that turns it into a social science which explains the
world as it actually is – not a device for better predicting the
economic weather.
Alternatives exist
To be sure, Haldane questioned standard economic assumptions
such as that of all actors being perfectly rational. He has also
encouraged the use of alternative methods like agent-based modelling,
which offers a more realistic view of individual behaviour. Yet, his
proposals for reform are limited and weak. The notion that economics
might need to be reworked from first principles and rebuilt as a more
open and less formal social science remains implicit in his criticisms.
Alternative economic ideas do exist. They exist among dissenting heterodox economists, but they remain on the fringes of economics debate, without any real influence on the core discipline itself. Big thinker: Friedrich Hayek.LSE Library, CC BY
This fact is probably a surprise to most. Surely the crisis has led
to a rebirth in the study of great economic thinkers like Marx, Keynes,
and Hayek? After all, these thinkers studied in detail the economic
system including its crisis-prone nature.
The sad truth is that this rebirth hasn’t happened. In fact, any rebirth has been stifled by the insularity of the economics discipline.
Economic dissenters like Marx, Keynes, and Hayek are still more likely
to be studied by scholars outside of economics than within it.
So while Haldane is correct to call for reform in economics he misses
the barriers to reform and the need to overcome them. He misses how
economics has stifled dissent and how the restructuring of economics
requires root-and-branch reform in the way that economics is studied. We
need economists that are not better weather forecasters but rather
committed social scientists concerned with addressing and resolving
real-world problems on an ongoing basis.
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