Bank of England guru: We’re crowdsourcing economics

2 May

NS 3014:
* 26 March 2015 by Sean O’Neill and Richard Webb


Andy Haldane is chief economist of the UK’s central bank, the Bank
of England, and a member of its Monetary Policy Committee. The
bank’s One Bank Research Agenda includes making a range of data sets
available to external researchers, and several competitions

The financial crisis showed just how wrong our economic models can
be, says the bank’s research chief, Andy Haldane, who is turning to
science for answers

The Bank of England is opening up its research efforts. Why?

Historically our research has been confined to this building and we
haven’t been very good at spelling out what we don’t know. For the
first time in our 320-year history, we are reaching out to
researchers beyond the bank. We know that modern challenges can’t
all be resolved in-house, so we’re hoping others will help us. It’s
a more crowdsourced, open-access approach.

Why did you decide a change was needed?

It is partly a sackcloth-and-ashes response to the global financial
crisis, because some of our models and ways of thinking didn’t bear
the scrutiny that they came under. As a discipline, economics has
been quite blinkered. In the light of the crisis, what better time
to do some more cross-fertilisation between disciplines?

What are you hoping to achieve?

We’re trying to make better sense of social systems like the economy
and the financial system. We’ve already begun to make strides. I
have tried to fuse bits of economics with physics, epidemiology,
psychology, anthropology and one or two other ologies, to try to
make sense of the world.

Where do you think progress will come from?

There’s already been some. Behavioural economics has become sexy
over the last ten years. In our old models, everyone was deemed to
be a fairly efficient processor of information. But we know from
psychology and sociology that that’s not how people make decisions.
We’re all riddled with behavioural biases, and we make decisions in
a world that’s messy and noisy and uncertain, and emotion, fear and
greed come into it – that’s what humans are.

All this sounds completely obvious now, but those were not the
edifices on which we built our models of the economy. They need to

What else did economists get wrong?

One of the guilty secrets of the pre-crisis period is that
institutions, including banks, didn’t form a big part of the models
we were using to make sense of the economy. In some cases they
played no part at all.

We had many fat years, remember, where growth had been good,
inflation pretty low, and the financial system had behaved
impeccably. So we weren’t thinking about the banking system as an
acute source of threat or instability. There were some – though not
the Bank of England – who claimed that financial-system risk had
been done away with.

That was a pretty big mistake…

There’s a book looking at the history of financial crises called
This Time is Different, by Carmen Reinhart and Kenneth Rogoff. The
title is meant to be ironic, because the prevailing mood of any
given crisis is that it is different. But this crisis was different.
We have not had a genuinely global financial crisis before – one
that has taken in pretty much every country on the planet at pretty
much the same time, at pretty much the same scale.

When Lehman Brothers went down in 2008, pretty much every country
fell off the cliff because we are networked in a way that we never
were before.

What new kinds of information do you need in a networked world?

One of the key elements of our new agenda is a better understanding
of how social systems behave under stress. We’ve started investing
in new data sets and databases – social media information and the
like – to help us do that.

How can social media help us understand the economy?

In the run-up to the Scottish referendum, we were closely monitoring
Scottish banks for any signs of flight of deposits. One way of doing
that was to phone the banks every few hours. But we also set up a
system that monitored social media. For example, we looked for
tweets that contained the words “Scottish bank”, “referendum” and
“panic” or “run” and plotted the online traffic.

There wasn’t any real sign of panic building up. We don’t yet have
an example of a bank-run type behaviour that’s been picked up by
social media – but the dynamics of financial crises are no different
in many respects to behaviours during the Arab Spring or the 2011
London riots, which we know were picked up by social media, so this
will be a source for us.

What other approaches are you using?

The standard way of measuring employment in the UK is to go around
and count heads, asking people whether they have a job or not. The
infrastructure needed to do this is costly. Alternatively, we can
track the number of Google searches on the term “jobseeker’s
allowance”. If you do that, and plot that series against the
official unemployment rate, you see a strikingly close match. One of
the lessons we are learning is that what people are saying matters
just as much as what they’re doing.

We’re not planning to cast aside all of our existing data. But
should we make use of the data that is becoming available at a rapid
rate of knots? Absolutely.

Is bitcoin on your radar?

Yes. A digital currency – be it bitcoin or something else – could
make significant inroads into how we think about and use money. The
clever bit about bitcoin is that it solves a problem that had
previously been seen as largely intractable, which is how to achieve
authentication of a transaction without requiring a trustworthy,
neutral third party, such as the state. This could be
transformational for money and for other things.

Could it make a difference to what money looks like, how it
functions, how the bank issues it? Maybe. These are the sorts of
questions our new research agenda is about.

How will you apply what you are learning to protect the UK economy?

In a system that’s very noisy and messy, sometimes the best you can
do is avoid the worst. In other words, build lots of safeguards into
that system. Some of our policy interventions over the last few
years have been in that spirit.

We might also intervene to reshape financial networks, and some of
our interventions have been of that structural nature, requiring
banks to ring-fence different parts of their activity, for example.
That was inspired by epidemiology, and models of forest fires.

If stability is the goal, does that mean you’ll judge yourself as
having succeeded if nothing happens?

Social systems need to go through upswings and downswings – and
occasionally need to fail. It’s how they fail that matters, ideally
in ways that don’t tip the economy over a cliff. That’s what we’re
in the business of avoiding. I’ll judge myself as successful if I
make myself redundant. I think we’re a few years away from that, but
it remains my aspiration.


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