A Crisis in Economics? If Only It Were True…

The Bank of England's chief economist, Andy Haldane, has grabbed headlines by criticising the economics profession. This has, in turn, led to a bout of soul searching in the economics profession as we face, again, the familiar criticism of why no-one predicted the 2008 financial crisis (in fact, some economists did predict the crisis, but that seems beside the point) and reflect on whether the subject is being taught properly at school and university.

But Haldane’s criticisms are less severe than they might first appear. Indeed they remain largely innocuous while they remain at the level of economic prediction.

Haldane, to his credit, has highlighted the more deep-seated problems of 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, Haldane distracts attention away from the above problems by focusing on the issue of forecasting. He misses the opportunity to ram home the point that economics is flawed in a fundamental sense. Better forecasts cannot exonerate economics from its failing now and in the past.

I would argue that economics should be in crisis. But in reality it is not. Rather economics remains largely the same as it was before the 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 economics on policy.

To think of economics in terms of forecasting is to limits its nature and scope. Economics ought to be about explanation, not forecasting. 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. Models are all that count. These have to be presented mathematically and, if possible, subject to econometric testing. In the latter case, models are often too abstract to be tested and they exist as formal abstractions with no connection to the real world.

All kinds of heroic assumptions are made in economics. These range from the notion of a representative agent to a world free of money. 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 to the economics discipline.

The same theories get recycled in economics via journals and conferences. There is a deep commitment to formal methods and to a peculiar set of concepts (utility functions, maximising agents, etc.). These are applied unrelentingly whatever the topic or problem. At the same time where engagement is made with other disciplines it is in the form of ‘imperialism’ – the taking over of other disciplines by the imposition of the same methods and concepts. As things stand, there is little chance that economics will open up to the ideas and methods of other disciplines.

Haldane’s criticisms of economics, in short, 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. What he misses is the need for economics to embrace reform that turns it into a social science, not a device for better predicting the economic weather.

To be sure, Haldane has questioned standard economic postulates such as that of perfect rationality and has encouraged the use of alternative methods like agent based modelling. Yet, his proposals for reform have their limits. The notion that economics might need to be reworked from first principles and recreated as a more open and less formal social science remains implicit in his criticisms.

Alternative economic ideas do exist. They exist in heterodox economics, though in this sense they remain on the fringes of economics debate, without any real influence on the economic discipline itself. This fact is probably a surprise to the public. Surely the crisis has led to a rebirth in the study of great economic thinkers like Marx, Keynes and Hayek in economics? The sad truth is that this rebirth has not occurred. 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 explaining and understanding the world as it actually exists. We need an economics fit for purpose, a weatherproof economics capable of addressing and resolving real world problems on an ongoing basis.