Another harsh and ribs-poking article from Andy Haldane:
There is a long list of culprits when it comes to assigning blame for the financial crisis. This column argues economists are among the guilty, having succumbed to an intellectual virus of theory-induced blindness. It adds this calls for an intellectual reinvestment in models of heterogeneous, interacting agents, following in the footsteps of other social scientists. This will require a sense of academic adventure sadly absent in the pre-crisis period.
He points to two areas where econs turned blind which ended up being the perfect blindspots ahead of the recession:
Two developments – one academic, one policy-related – appear to have been responsible for this surprising memory loss. The first was the emergence of micro-founded dynamic stochastic general equilibrium (DGSE) models in economics. Because these models were built on real-business-cycle foundations, financial factors (asset prices, money and credit) played distinctly second fiddle, if they played a role at all.
The second was an accompaying neglect for aggregate money and credit conditions in the construction of public policy frameworks. Inflation targeting assumed primacy as a monetary policy framework, with little role for commercial banks’ balance sheets as either an end or an intermediate objective. And regulation of financial firms was in many cases taken out of the hands of central banks and delegated to separate supervisory agencies with an institution-specific, non-monetary focus
talks of making econ inter-disciplinary:
Conventional models, based on the representative agent and with expectations mimicking fundamentals, had no hope of capturing these system dynamics. They are fundamentally ill-suited to capturing today’s networked world, in which social media shape expectations, shape behaviour and thus shape outcomes.
This calls for an intellectual reinvestment in models of heterogeneous, interacting agents, an investment likely to be every bit as great as the one that economists have made in DGSE models over the past 20 years. Agent-based modelling is one, but only one, such avenue. The construction and simulation of highly non-linear dynamics in systems of multiple equilibria represents unfamiliar territory for most economists. But this is not a journey into the unknown. Sociologists, physicists, ecologists, epidemiologists and anthropologists have for many years sought to understand just such systems. Following their footsteps will require a sense of academic adventure sadly absent in the pre-crisis period.
Haldane is clearly one of the persons to follow..