Economists are working hard to figure out how to deal with a world economy lurching from one crisis to another – but no one seems to listen to their advice.
The Bank of England’s chief economist Andy Haldane claims policy makers are ignoring experts and failing to focus on economic problems.
The problem, he says in a report for the Organisation of Economic Co-operation and Development (OECD), is complicated theories in central bank and government tool boxes can be applied to the jigsaw of an economy – but should be used on all the pieces to see how they interact as well.
Many regulators are following the complexity theory put forward by Herbert Simon, says Haldane.
Risk of disorder
Simon argues that decomposable networks where each part is partitioned from the rest are more resilient than other systems because the entire system does not depend on any one part that may misfire.
“If these hyper-connected networks do face systemic threat, they are often able to adapt in ways which avoid extinction,” said Haldane.
“The risk of social, economic or financial disorder will typically lead to an adaptation of policies to prevent systemic collapse. These adaptive policy responses may preserve otherwise-fragile socio-economic topologies.
“They may even further encourage the growth of connectivity and complexity of these networks. Policies to support super-spreader banks in a crisis for instance may encourage them to become larger and more complex.”
Economics in crisis
Haldane suggests economists need to collect more data and model each part of the economy in detail – including how that sector interacts with all the other sectors.
He also argues the Tinbergen Rule should come into play, which is a complicated theory calling for policy makers to have at least one tool to tackle each policy target.
For example, pension saving (a tool) targets the need the elderly have for an income (target).
“There is a crisis in economics. For some, it is a threat. For others, it is an opportunity to make a great leap forward, as Keynes did in the 1930s. But seizing this opportunity requires first a re-examination of the contours of economics and an exploration of some new pathways,” said Haldane