‘Economists at Fault for Recent Crises’: An Interview with the Bank of England’s Andy Haldane

In a recent interview, INET Advisory Board member and Executive Director for Financial Stability at the Bank of EnglandAndy Haldane took aim at the economics profession.

Asked if the economists should shoulder blame for the recent crises, Haldane didn’t pull any punches:

“It’s right that it should shoulder some of the blame. It certainly shouldn’t shoulder all of the blame, because when I go down the roll-call of people who got things wrong, ‘economists’ are but one name on that list. In part, this is because thinking within the wider academic economic community did start to shape and influence public policy in important ways. Strictly speaking, this is a good thing, that policy-making learns from what is being said in the wider academic world. But in this particular case it meant that a rather restricted and blinkered view of the dynamics of social and economic systems got carried across into how public policy was thought about and executed.”

He continued by saying that economists became too fascinated with their own creations and lost sight of the real world:

“I think one of the great errors we as economists made in pursuing that was that we started believing theassumptions of economics, and saying things that made no intellectual sense. The hope was that, by basing models on mathematics and particular assumptions about ‘optimising’ behaviour, they would become immune to changes in policy. But we forgot the key part, which is that the models are only true if the assumptions that underpin those models are also true. And we started to believe that what wereassumptions were actually a description of reality, and therefore that the models were a description of reality, and therefore were dependable for policy analysis. “

While talking about the need for a more historical approach to economics, Haldane also suggested that the narrow approach of recent economics was not always dominant:

“Economics needn’t be restrictive. Economics as a discipline grew out of a broader concern with political economy, with sociology, with philosophy. And that was true right through until the latter part of the 1960s and early part of the 70s. The towering economists of the twentieth century had a much richer idea of what economics was about than the recent neo-classical synthesis. They were all some hybrid of economist, sociologist, mathematician, political scientist and philosopher. Hayek, Keynes, even Friedman were very much cut from that cloth.”

He continued by suggesting that economics has neglected one of the defining issues tackled by its past luminaries:

“Another feature which links those three individuals - for not unrelated reasons - would be that they have placed centre stage the sense that our socio-economic knowledge might be deeply imperfect. And that has been a theme that I’ve looked to pick up. It’s not a new theme. It has required me to go back and read or in some cases re-read what was written by them and others. The notion of not knowing, of imperfect information, of uncertainty (as distinct from risk) got lost from economics and finance for the better part of 20 or 30 years.

In some ways, we’re just starting to rediscover that now, of how little we really knew, both pre and post-crisis, of how this complex adaptive economic and financial system really behaves. So I don’t think of this as being outside of where economics has been, other than over the past 20 or 30 years where it’s taken a rather narrower track, a rather narrower view of itself, than it did over the previous 200 years.”

Haldane also talks at length about what he sees as the key issues in finance and central banking, going as far as saying “a massive shift from where central banking has come from” is needed.

Click here to read the rest of the interview