Andrew Haldane, who is well known among readers as being one of the most outspoken and truthy central bankers in the world, will become Bank of England's Chief Economist in June. That fact is what makes his comments - however factually honest - extremely uncomfortable for the Keynesian status quo DSGE modelers alive and well in every central bank in the world. To summarize his thoughts in the following letter - the models are useless and it's time to rethink everything...
In the light of the financial crisis, those [macro and micro model] foundations no longer look so secure. Unbridled competition, in the financial sector and elsewhere, was shown not to have served wider society well. Greed, taken to excess, was found to have been bad. The Invisible Hand could, if pushed too far, prove malign and malevolent, contributing to the biggest loss of global incomes and output since the 1930s. The pursuit of self-interest, by individual firms and by individuals within these firms, has left society poorer.
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The crisis has also laid bare the latent inadequacies of economic models with unique stationary equilibria and rational expectations. These models have failed to make sense of the sorts of extreme macro-economic events, such as crises, recessions and depressions, which matter most to society. The expectations of agents, when push came to shove, proved to be anything but rational, instead driven by the fear of the herd or the unknown.
The economy in crisis behaved more like slime descending a warehouse wall than Newton’s pendulum, its motion more organic than harmonic.
...we are a co-operative species every bit as much as a competitive one. This is hardly a surprising conclusion for sociologists and anthropologists. But for economists it turns the world on its head.
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In this light, it is time to rethink some of the basic building blocks of economics.
Full report below...