Who Scared the Rocking Horse?

Andy Haldane, Chief Economist at the Bank of England and an economist lauded for his intellectual judgement gave a superb speech to student economists last week in which he said there has never been a better time to study the subject.

In a talk entitled "Who Scared the Rocking Horse?", Mr Haldane focused on the causes of global financial crisis and the extraordinary effects it had followed by an unprecedented macro policy response.

The core theme of the talk drew on on a famous quote from Knut Wicksell (1918)

“If you hit a rocking horse with a stick, the movement of the horse will be very different from the stick. The hits are the cause of the movement, but the system's own equilibrium laws condition the form of movement"

Instead of economic and financial systems resembling a rocking horse with resilience and underlying stability. Modern, complex and highly inter-connected economies are better described by a group of wild horses. External economic shocks are more frequent than policy-makers have thought likely and when they occur, it is almost impossible to model accurately how confidence, spending, production and investment will head as agents in affected economies react.

Mr Haldane argued that the teaching of economics needs to change in response to the events of the last eight years. More needs to be done in crossing the disciplines – for example between economics, physics, sociology and anthropology. Deeper research is needed to map economic, financial and social networks and in understanding agent behaviour.

And in a world of great uncertainty and complexity, fighting fire with fire - namely ever more detailed regulation - can be counter-productive. Instead, well articulated and clearly enforced rules of thumb for financial institutions might work better in creating a fire-break against future crises and in limiting their hugely costly externalities.

Mr Haldane recommended that today's student economists research the writing of Stiglitz, Keynes, Herbert Simon and Hyman Minsky as an aid to understanding contemporary economic issues with a fresh light.