The Chancellor, Rachel Reeves, often mentions her experience as an economist at the Bank of England. But she has been taken to task by no less a figure than the former chief economist of the Bank, Andy Haldane.
Haldane notes that “just after the election, there was a sense of refresh, a sense of renewal, a confidence about the UK both domestically and internationally”.
But he went on to say that the Chancellor’s claim of a £22bn black hole in the public sector finances was both “unnecessary and unhelpful”.
Haldane attacked Reeves for creating a sense of “fear and foreboding” which could undermine the economic recovery which was underway.
At first sight there is something rather odd about Haldane’s choice of language. It is almost as if he was writing a piece about a poem or a Shakespeare play, with his talk of a “sense of refresh”, “fear and foreboding” and such like.
Surely economists at the Bank spend their lives immersed in the mathematical intricacies of dynamic stochastic general equilibrium models and generalised autoregressive conditional heteroscedastic processes?
Well, they do. But, equally, the concept of a narrative, mood or sentiment which prevails around an economy is becoming very fashionable in economics.
Nobel Laureate George Akerlof was the first top modern economist to entertain such ideas in a paper he published in 2000 with Rachel Kranton.
The title, Economics and Identity, was in itself disturbing enough to many conventional economists. But the authors went on to place standard psychological concepts such as self-image centre stage. They claimed that incorporating such factors into economics “substantively changes conclusions of previous economic analysis on topics such as the economics of poverty and the household division of labour”.
The leading proponent now is probably Akerlof’s fellow Nobel Laureate Robert Shiller, who published a paper in the American Economic review in 2017 entitled, quite simply, Narrative Economics.
Shiller goes so far as to quote the French existentialist philosopher Jean-Paul Sartre: “A man is always a teller of tales, he lives surrounded by his stories and the stories of others, he sees everything that happens to him through them”.
He argues that narratives are key to understanding major events in economic history such as the Great Depression of the 1930s, when one in four Americans were out of work, and the financial crisis of the late 2000s.
None of this would have come as a surprise to John Maynard Keynes, whose magnum opus The General Theory of Employment, was published in 1936.
Keynes has become associated with the idea that public spending is needed to revive an economy in recession. But, in a short yet crucial passage which modern Keynesians conveniently ignore, he argued that the positive boost would be undermined if the increase in public borrowing which it entailed had an adverse effect on “confidence”.
He conjured up the memorable phrase “animal spirits” to describe why, for example, entrepreneurs undertook ventures even though it is well known that most of them fail. He wrote of the “uncontrollable and disobedient psychology of the business world”. The text of his book is in fact littered with the words: “psychology” and “psychological”.
All well and good, we might say, but how do we identify a narrative and how does it arise? Here, in very recent years machine learning algorithms have made huge strides forward in turning text into data, in measuring sentiment in text such as newspapers and social media.
Haldane’s approach to criticising the Chancellor’s strategy is based on intellectual foundations created by great economists such as Keynes and modern Nobel prize winners.
Economies really can be talked into a recession. The Chancellor needs to be very careful with her message of doom and gloom.
