Mainstream economics — sacrificing realism at the altar of mathematical purity

22 Nov, 2016 at 18:05 | Posted in Economics | 6 Comments

e0f5b445c333de539ad33c6a63606b56Economists are too detached from the real world and have failed to learn from the financial crisis, insisting on using mathematical models which do not reflect reality, according to the Bank of England’s chief economist Andy Haldane.

The public has lost faith in economists since the credit crunch, he said, but the profession has failed to thoroughly re-examine its failings to come up with a new model of operating.

“The various reports into the economic costs of the UK leaving the EU most likely fell at the same hurdle. They are written, in the main, by the elite for the elite,” said Mr Haldane, writing the foreword to a new book, called ‘The Econocracy: the perils of leaving economics to the experts’ …

The chief economist said that the Great Depression of the 1930s resulted in a major overhaul of economic thinking, led by John Maynard Keynes, who emerged “as the most influential economist of the twentieth century”.

But the recent financial crisis and slow recovery has not yet prompted this great re-thinking …

For now, economists need to focus on reviewing their models, accepting a diversify of thought rather than one solid orthodoxy, and on communicating more clearly.

Economists should focus on other disciplines as well as maths, he said.

“Mainstream economic models have sacrificed too much realism at the altar of mathematical purity. Their various simplifying assumptions have served aesthetic rather than practical ends,” Mr Haldane wrote.

“As a profession, economics has become too much of a methodological monoculture. And that lack of intellectual diversity cost the profession dear when the single crop failed spectacularly during the crisis.”

Tim Wallace/The Telegraph


  1. Whilst the way that mathematics is used in economics lacks a degree of realism, there is nothing any better. The word-argued discussions are mere playgrounds for expressing opinions rather than establishing profound truths. Maths can do better in this regard and it is shameful to pretend that it has so little value in seeking economic truths.

    • Henry, as a mathematician I do accept with regret that ” mathematicians have had a large part to play in events that have brought the financial markets to their knees (GFC, LTCM crisis).” This is something that needed correcting, as I have been arguing since the late 90s. But I do not accept that continuing to side-line the relevant mathematics is the answer: it just means that we will be equally misguided in the future, and equally or more liable to crises, not just financial.

      Many mathematicians, including Keynes and Russell, have for many years been noting that the misuse of mathematics has been having a large part to play in events that brought about various crises. In this sense the financial crisis was just one more. Some of the mathematicians that I regard as ‘proper’ have been using the word ‘corruption’ with regard to the practice of recruiting mathematicians who are often not even used as mathematicians, but simply as number-crunchers to bamboozle clients and regulators, leaving an inadequate supply for more socially usefully purposes (such as education).

      It seems to me that the only effective antidote to what Keynes called pseudo-mathematics in economics is the kind of mathematics developed by Keynes, Russell and others. If this is too difficult then maybe we need to start by reinvigorating the education system. (Or de-corrupt, if you will.) I guess blogs like this are a start.

      In brief, the pseudo-mathematics of economics and finance is very far from ‘mathematical purity’. I’m not sure that we need purity on the part of most practitioners, but we do need some purity somewhere, and for it to be very much more influential than it has been, resisting corruption.

      • Dave,

        I would agree that there is a place for mathematics in economics – in many ways it is indispensable, but not always and not by necessity. Mathematics of itself does not add veracity to an argument and in many ways can divert attention from what is important and of value in an economic argument.

      • Henry,

        As a mathematician (and hence possibly biased) it seems to me that if one can express a theory in mathematical terms and it is then mathematically false, it ought to be corrected. For example, many economists suppose that economies are dynamic, stochastic and stable. Interpreting these terms mathematically would seem to contradict a mathematical result of Turing. Thus either the economists are wrong, or they don’t mean what they seem to mean to a mathematician – or possibly both. In any case, it would seem to me to have practical value to try to develop a theory of economics that was mathematically credible. (In this case it seems to me that economies aren’t stable, but even where the resolution isn’t so obvious I think it worth trying to resolve the conflict. One shouldn’t just ignore the mathematics, as is so commonly done.)

        I agree that mathematics can be used to divert attention away from what is important – it generally has in finance and economics. But this seems more prevalent when the mathematicians have been ‘corrupted’ (badly incentivised). Keynes managed to use the mathematics to shed light on what was important: that’s how mathematics should be used.

  2. David,

    Aren’t you are treading on very tenuous ground?

    Firstly, you want to slide the argument and attention off mathematics and mathematicians and divert it to corruption.

    Secondly, you forget that mathematicians have had a large part to play in events that have brought the financial markets to their knees (GFC, LTCM crisis).

  3. I wonder what Andrew Haldane thinks is ‘mathematical purity’? Could it be those practices that some mathematicians were describing as corrupt?

    In fairness, many scientists are in favour of ‘Occam’s razor’ (Ockham?), which economists used to defend their strange (if ‘mathematical’) practices. But Occam’s razor is only meant to be used to break ties between different theories, not to override logic and evidence.

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