Economists are too detached from the real world and have failed to learn from the financial crisis, insisting on using mathematical models which do not reflect reality, according to the Bank of England’s chief economist Andy Haldane.
The public has lost faith in economists since the credit crunch, he said, but the profession has failed to thoroughly re-examine its failings to come up with a new model of operating.
Instead, he fears, it is still using the same failed analyses, and is still failing to speak effectively to the public.
This applies to an all manner of areas, from studies of the financial meltdown to analysis of the Brexit vote.
“The various reports into the economic costs of the UK leaving the EU most likely fell at the same hurdle. They are written, in the main, by the elite for the elite,” said Mr Haldane, writing the foreword to a new book, called ‘The Econocracy: the perils of leaving economics to the experts’.
The chief economist said that the Great Depression of the 1930s resulted in a major overhaul of economic thinking, led by John Maynard Keynes, who emerged “as the most influential economist of the twentieth century”.
But the recent financial crisis and slow recovery has not yet prompted this great re-thinking.
“Thus far at least, the present crisis has yet to spawn a Keynes for the twenty-first century. And nor have we witnessed any great leap forward analytically. Perhaps it is simply early days,” he said.
“Salvation for the economics profession probably lies not among existing academic and policymaking dinosaurs, like me, but among the new generation of students of the discipline.”
For now, economists need to focus on reviewing their models, accepting a diversify of thought rather than one solid orthodoxy, and on communicating more clearly.
Economists typically explain their ideas in unreasonably complex ways, he fears.
“It would be easy to suggest that redemption lies in improved programmes of public understanding of economics. And doubtless they have their part to play,” he said.
“But just as important will be programmes that improve economists’ understanding of the public.”
Another aspect of that is that economists should focus on other disciplines as well as maths, he said.
“Mainstream economic models have sacrificed too much realism at the altar of mathematical purity. Their various simplifying assumptions have served aesthetic rather than practical ends,” Mr Haldane wrote.
“As a profession, economics has become too much of a methodological monoculture. And that lack of intellectual diversity cost the profession dear when the single crop failed spectacularly during the crisis.”
Topics such as economic history, banking, money , moral philosophy, radical uncertainty and non-rational expectations all “abut and illuminate economics” but have suffered “neglect” in the profession, he said.
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