The Mint: Good morning Alan, and thank you very much for giving some of your time to speak to the Mint Magazine.
Alan: It’s a pleasure, Henry.
The Mint: Brilliant. Well, I’m going to start with the obvious question, I think most interviews start with, but I think it’s interesting anyway. What drew you in the first instance to study in economics?
Alan: Ah, well, I could give you a long answer, Henry, but I’ll give you a very short one. After finishing at Oxford, I became a public school teacher for a while. There were no taught master’s courses at that time, so you couldn’t switch subjects. And I had started in law and then in geography. But I went to evening classes in the UK and went, I think, it was called the Workers Educational Association and they had courses.
The Mint: Oh, really? That’s fascinating. Can you remember how you heard about that? That’s an interesting institution, with a long history, isn’t it?
Alan: That’s right. And it was a small group of people, mainly trade unionists, and so it was fun. And we had a professor from Lester University, so he taught these courses in the evening in economics and I became fascinated with that. And I wanted to get into economics but I didn’t know how. Went to Johns Hopkins who have a centre in Bologna and they had international relations, economics and so forth. And that’s where I started, okay?
The Mint: I can imagine. I’m just thinking back to being in a class with some trade unionists and having a discussion about economics. That must have been a lot of quite different and opinions, where there?
Alan: That’s right, yes. And it’s very informative, because that’s probably a side of the arguments that you just don’t hear normally. And all of a sudden I was sitting amongst them and we had good discussions, it was fun. But anyway, so I then went off, the people in Bologna, gave me recommendations. I went to the States to do my PhD, and there I started out in Minnesota, very cold and then very mathematical. So I suffered for a year minus 30 degrees and so forth. And then at that point I wanted to run away from this mathematical stuff, which I hadn’t done before. And my advisor was a man called Hugo Sonnenschein, a famous theoretical economist who became president of the University of Chicago.
Anyway, I ran to Princeton and there I thought I was going to learn about real economics, not mathematical economics. But I fell under the spell of Harold Kuhn, a mathematician. And so he became my thesis director, and I started out as a mathematical economist. And then to finish this story, after a few years when I left Harold, and he said, “Alan, if you think economics is all about maximised people maximising concave functions on convex sets, you’ll be very happy in economics. But if you think it’s about something more important than that, then you’ll change your mind in a few years.” And that’s exactly what happened, okay?
The Mint: Now, that’s very interesting, because obviously lots of people go into economics and study equilibrium and maths, et cetera, et cetera, and spend their whole career doing that, very happily. They move up the ladder, they get tenure, they get a good position and so on. But you made a dramatic change in direction. And what you put that down to, in yourself or your background or influences over you?
Alan: Partly because I started a bit later, having had this little gap and therefore, was thinking about these things, partly because of the people I met, for example, the trade unionists and so forth. And then more importantly, I just didn’t feel that I was learning anything about what actually made the economy tick. This was interesting and intellectual stuff, but it wasn’t in fact telling me very much about how the economy worked. And that’s why I got out of it and then started doing things like studying the fish market in Marseilles, studying the foreign exchange market. I had a Houblon-Norman Fellowship to do that. And actually asking people, “What do you do?”
The Mint: I want to find out more about that in a moment. But the way you tell that story, it’s as if, well, why wouldn’t you want to understand more about the economy? And clearly doing mass and theoretical models doesn’t seem to relate to what’s really happening in terms of economic phenomena. So it begs the question for me, is why more people aren’t like you, I guess? Because in a way you can say, well, of course you would want to go and actually study the real world economic phenomena. But the truth is, very few economists want to do it. So is there something about economists rather than something about you that gets some stick with that path?
Alan: I think it’s a natural reaction. You get into this field, as a profession, has criteria and the criteria turnaround, publishing articles on the economics. And so you pick up all the background from the people who’ve been teaching you, and then you move on in that field. You stop looking at the object that should be interesting you. And I think that’s exactly what happened to me. And it was an eye-opener for me to study these markets. But I think it was Phil Mirowski, a historian of economic thought who once said that, “Most great theoretical economists have never set foot on a market.”
But we talk about markets all the time, and it’s curious that very few people actually spent time on markets. Some people have, of course, but very few I would say of my colleagues actually spent any time really, unless they were just taking the data and analysing it, if you understand what I mean. They weren’t really interested in going onto the market. I mean, being on the market in Marseilles at two o’clock in the morning, asking people how they decide on what the prices are, is a bit weird, but very [inaudible 00:06:47].
The Mint: Other economists do suggest that it’s just idle talk, don’t they? I mean, the qualitative research is generally dismissed by most of economists, isn’t it?
Alan: Yeah. But I think you learn a lot from it. And the problem is, unfortunately, if you ask people what they do, most of them have done it so long and so intensely that they can’t actually reconstruct what it is that motivates them. So I was always looking for opportunities where you could find out something a bit more. We went to Moscow just after the fall of the Soviet Union and there were all these kiosks spun up everywhere around the metro stations selling everything. People selling, who had not done that activity before. And it was fascinating to ask them because they had thought about that, because they actually started, so they knew what was going on. And we never published that work and I think we should have done. But it was really interesting and you find out that it’s not the usual stories. And why were the prices higher in some metro stations and around some metro station and not others?
And then my first co-author on that said, “Oh, that’s just because the income level there is higher. These are wealthier areas of Moscow and so forth.” And that wasn’t true. And it turned out that what actually happens is that people have rules for deciding, “Oh, well I’m going to match the lowest price around here,” or, “I’m going to add a markup to the price that I get.” And so forth. And you ask them about these rules, and what you’ll find is that in each metro station, they’ve somehow conversed on some rule which they’re all using, and that makes the prices different. So some people are really basically watching each other and charging the average price around and so forth. But anyway, the point was, there you actually learned about how people were actually were doing things, and that was fascinating.
The Mint: And so was this movement part of it, where suddenly you had a renewed intellectual interest or fascination after being stuck with mathematical models, if you like?
Alan: Yeah, that’s right. And that’s not to say that it was never useful. I mean, it’s not true that we could just throw the whole of economics into a bin. But it wasn’t useful… Who is it at Harvard who once said, “There’s scientific economics and engineering economics?” Mankiw, that’s right. And he said, “I think we’ve made a lot of progress on the science side, but the engineering side hasn’t really benefited from that.” So he said, “I think that the reason that economic theory isn’t so much used by policymakers, is it’s not fit for that purpose.”
The Mint: So one wonders what purpose [inaudible 00:09:50].
Alan: Exactly right.
The Mint: So you started this study of what really happened in markets, back in, what, the late eighties, early nineties as the-
Alan: Oh, no, no.
The Mint: Earlier than that, was it?
Alan: Yeah, yeah. I would say yeah, end of the seventies.
The Mint: End of the seventies?
The Mint: And so have other people started doing the same stuff, actually going out and finding out how people make decisions in markets and so forth, within the economics profession?
Alan: Yeah, quite a lot of people have. But that’s not a way to rise to the top in the economics profession. And Tony Atkinson once said to me, “Alan, this is very interesting, but that’s anthropology. It’s not economics.”
The Mint: Well, it’s interesting that, because actually I find that the people who do this work are often anthropologists or sociologists, aren’t they? And they get great insights, but of course, they’re not treated as if they’re economists, as if what they’ve learned is irrelevant.
Alan: That’s right. And they’re thought of as being somehow soft, it’s not rigorous. But I think that’s a mistake and we can learn a great deal from anthropologists, sociologists, political scientists and so forth.
The Mint: It’s an interesting word, this soft, which often as a word, it’s associated with the feminine, being soft, isn’t it? And I wonder, is there a male patriarchy that hard real men do mathematics and tough stuff like that and it’s somehow female and other to do this soft stuff?
Alan: Yeah, I would hate to get onto the gender field, but it is true that economics has been dominated by that spirit. If isn’t hard and serious, if you start to talk to people and ask them, then you can’t quantify that properly. And therefore, you can’t really take that as seriously as if you had proved something. But you remember Frank Hahn who was a great theorist, I don’t know whether Frank ever even went on markets, but Frank said that, “I doubt that in the future economists will ever be able to prove any results.” And he said, “I think the future lies more in computer science and computational economics and simulation.” And people were absolutely astounded by that. That was ’91, he said that, when he was asked about the future of economics. And everybody thought he would say more and more elaborate, more and more beautiful models than what he said. And I think there’s a lot of truth and you can see that in the evolution of economics and [inaudible 00:12:44] too.
The Mint: And so was… Right, we rejoin. Thank you, Alan, for moving to a place where you are getting better receptions and hopefully things will be clearer. Where we got to was talking about computational approaches to economics. And I wondered whether agent-based modelling was what Hahn was talking about and this is what inspired you?
Alan: No, I think because he was writing that in ’91 when he was asked, what’s going to happen to economics in the next century? And agent-based modelling really hadn’t taken on at all. But he had this idea that putting things on a computer and running them and looking at simulations of what you did, rather than trying to prove something, would be the right way to go. So I think it was a great insight, but he didn’t really… The movement of agent-based modelling had not really got going then. And also you have to remember that’s a time when computer power was much less than it is now. I think we’ve forgotten how little it was then.
The Mint: But I understand, my understanding anyway, is that agent-based modelling per se, goes back to physics in the thirties, doesn’t it? It was used initially to understand the fragmentation of basic particles. And was actually used in a lot of other areas before it got to economics.
Alan: Right, yes. And of course it wasn’t often called agent-based modelling, but it was things to do with operations research and so forth. And it was pursued a lot in the second World War, mathematical programming and so forth. That’s all in some sense, the origin of agent-based modelling and we picked that up later on, I think. But my advisor at Princeton, Harold Kuhn was a big part of that post-war programme, if you like. And that’s where people were building computational models and it was a very respectable thing to do, but economists didn’t take it seriously at the time, I think.
The Mint: And do they now? Do you think agent-based modelling has got any level of traction in the economics profession?
Alan: Yes and no. In a sense that, in fact a lot of people, even in places like the US Treasury are using agent-based models, but they’re still not thought of as being the models we should look to for policy responses. So it’s got traction particularly with younger people at the Bank of England. There is a group of people who work on agent-based modelling for example. But it hasn’t taken over as the model that you would refer to, to make your policy. On the other hand, let me just make a very quick observation, which is that I think we don’t actually base our policymaking on the models. We use the models to generate some data and then there’s a long discussion about why we should modify that.
And so if you go onto the IMF blog, you see the models tell us this, and then there’s a discussion between all the people at the IMF about why that’s not right or what we should modify. So in some sense, models are not being used to produce. So that’s why we hear these forecasts, almost immediately afterwards the forecasts turn out to be wrong and then everybody explains why they were wrong and so forth. And so I don’t think we’re really using models in the way an engineer would, look at the dials and just move them. We’re actually using them as a crutch on which we then lean and then we modify it to get there. But I think agent-based is a bit different from that. We do actually programme the people and think, put them all together and see what happens and that’s a bit different.
The Mint: And I suppose agent-based models focus particularly on interactions, between agents, don’t they?
The Mint: And this is what you have been particularly interested in, is that right?
Alan: That’s absolutely right. I think that we spend much too much time at the beginning of economics teaching the people about how individuals work and the individuals… I think it was Axel Leon Hufford, I don’t know whether you remember that name, a man who was a specialist on kings in particular. But he once said that, “I think the big difference between the way economists think and other people think is that economists believe that they’re dealing with incredibly smart people, solving rather simple problems.” And he said, “In fact, what we’re dealing with is not very highly intelligent, sophisticated people. We’re dealing with rather simple people dealing with incredibly complex problems.” And so I think that is much more in line with how I think of the world too.
The Mint: It’s interesting this question of interactions, because I was just looking at another interview you’ve done, and there were two words that I would associate with interactions, which are, one is relationships and the other is power and neither of those appeared. And I wondered where you saw power and relationships fitting into that broader space of interactions?
Alan: Yeah. Okay, so relations, networks of contacts and people and clusters of individuals, I think that’s very important. And we don’t spend a great deal of time… We now do have a whole set of people who work on network economics, financial networks and so forth. And that’s serious work and very interesting. Andy Haldane was a pioneer at the Bank of England in that field. But I think in terms of relationships and the importance of those, we still underestimate them. And you see this exactly now, when you find out that people are very worried about how robust an individual bank is, but they should be worried about where their place in the network is. And that’s now come to be accepted. So people will talk about systemic risk. What they mean by that, is something which is some part of the system, which is key in terms of its relationships with everybody else.
But power is different, and I think that we haven’t really dealt with it in the same way as, for example, sociologists and political scientists are very interested in power of relationships. And I think they are terribly important, the hierarchy of influence and who’s following whom and who has control over who. And I think we are so obsessed with perfectly competitive markets where very few markets or very few parts of the economy are perfectly competitive, if any are. And there, the whole problem of who’s influencing whom. But you wouldn’t even think about explaining the energy problem today without worrying about the power relationships underlying that. But we don’t do that much.
The Mint: And it’s interesting, I question why? I mean, because I heard one explanation of why Elinor Ostrom never really looked at power in institutions, was that if she started looking at that, she would’ve lost her credibility as an economist as such, as much as, I mean she was more political economist anyway. But it was just a step too far to look at power dimensions.
Alan: Yeah, I think that’s right. But of course, you know as well as I do, that when she got the Nobel Prize, most economists, if you mentioned her name to them, “Who’s that?”
The Mint: Yeah, no, that’s true. I mean, it’s interesting. And because you’d think if you are examining institutions, you’d think an obvious thing to look at was power, yet she didn’t really look at it. But I mean, in one of the articles, I don’t know if we know a guy called Blair Fix who writes about hierarchy and power in economics. And he did a great analysis of the words used in economic textbooks and articles. And words about power were significantly underrepresented compared to normal everyday speech, if you like. And it seems to be an area that economists just don’t like to touch.
Alan: That’s right. But on the other hand, if you think about explanations of why it is that real wages haven’t gone up more than they have, and what you will hear from a lot of people, is because the balance of power between the two sides has changed. That is labour and organised labour is losing its power, bargaining power and so forth. But then there’s very little explanation of exactly how that was happening. For example, you do hear a discussion take Uber and when it sprung up, okay? So there you have these jobs which seem to be filling a niche. On the other hand, what happens, those people have no bargaining power because they’re independent contractors. And so power is mentioned in that context, but I think you’re right, it’s not a central thing. But that wasn’t true for older economists. Pareto was very interested in power. And so I think this is something, once again, it comes and goes, but it’s clearly extremely important and political power and even what was used to be called soft power, you know that notion?
The Mint: Yes, yes.
Alan: So power is clear clearly part of the structure of our society and our economy, a very important part.
The Mint: I suppose you’re saying things go in waves. I wonder generally, obviously the economics profession profession got a huge shock in 2008, 2009, and with even the Queen asking questions about their competency. It’s now over 10 years since then, has this all faded away, do you think? And people are pretending it never happened in the economics world? Or has it actually had longer term impacts on how the profession acts and thinks?
Alan: I don’t think that it really has and it should have done. And somebody recently pointed out that after that great shock, we’ll come back to that in a second, after that great shock, it took a long time for the economy to get itself back together again and probably up to 10 years, something like that. Whereas after COVID and so forth, the economy actually restructured itself very fast. And so that’s a very interesting question. Why was that? What happened there? And I don’t think we looked into that enough. So I think you were referring to that letter that was written in response to the Queen’s complaint about, “Why didn’t you people see this coming?”
The Mint: Yes. And the people who wrote it said they would look hard and deep et cetera, et cetera. And in 2012, 2013, there was lots of soul-searching, wasn’t there? But that seems to have all disappeared with no impact at all.
Alan: But without wishing to be rude to my colleagues, you remember what they said, “It was due to the failure of the imagination of very bright people.” Now, the very bright people being them, of course. And what was interesting, I think the Queen must have been a bit puzzled by, it was a failure of imagination. And when she thought of these people as being technicians really, they were people who should advise you and tell you what was happening. And then she was being told they didn’t have enough imagination. But they were referring to themselves. So it’s a curious status that I don’t know how people who signed that… It was the British Academy I think, right?
The Mint: Yes. Yeah.
Alan: So yeah, I think, again, you’re right, there’s been soul-searching, but not in a fundamental way. What we do is we take the models we have, the framework we have and we hang things on that, but we don’t actually think about changing that framework. But the world has changed radically. Things happen much faster now and interactions are quite different. The structure of the whole organisation of the world that we live in has completely changed. And we have things like the environment and so forth. I don’t think we really changed our basic framework. We try all the time-
The Mint: And do you think-
Alan: Sorry, go ahead.
The Mint: Is there any pressure from the policy world to economists to do better? I suppose you’ve particularly being obviously the chief advisor, economic advisor to the new approaches to economic challenges unit. Now that you could say was a policy demand for different sorts of thinking. Did that, has that, is that having an effect?
Alan: I don’t think it is very much. And the thing you’ve just mentioned, the new approaches to economic challenges, we built up a network of different sorts of specialists out of the field of economics also to consult about this and to discuss this and to put forward new and maybe even wacky ideas. And they would present it to people at the OECD. But now the OECD has decided that that’s not really a path they want to go down. And so new approaches isn’t their thing. And so in some sense, I think whenever this happens, whenever there’s a shock if you like, to use your word, to the system, the system has a tendency to defend itself and build back into the framework we’ve always worked in. But I don’t think that framework’s satisfactory now, that’s the point.
The Mint: And do you think people understand that more now than they used to? Can the economic profession get away with putting its head in the sand and pretending everything is fine?
Alan: Well, I mean, it’s done it for a long time. I mean, if you look back at the record of forecasting, it’s really not good. And yet very few people spend much time worrying about why that’s true. And I think the basic answer is that the system is one which is very difficult if even possible, impossible to forecast. The whole system is structured in a way that it’s moving with a lot of randomness, a lot of stochastic elements, and it’s very difficult to predict where it’s going. We don’t have simple causal relationships where we say, “Oh, if that happens, we can do that.” And so forth. That’s not the way the system is. And I think we try to act as if it were a machine that we can control or push the right buttons. But the system is not like that, the system is one where you have to be constantly adapting, looking, worrying about why this changed and so forth. You can’t write down the recipe and then hope that it’s all going to work out, because it doesn’t, but anyway, sorry.
The Mint: But what do you think the points of economists are? I mean, how do they manage to stick in their place doing the same things with little evidence of any success? How do they get away with it?
Alan: Well, it is a good question. I mean, let’s take the problem of inflation today, okay? You get people like Jerome Powell, what he said was, “I think what we’ve just done by raising interest rates could lead to a recession and we have no idea whether that will happen, nor do we have any idea about the severity of the recession that would ensue if it did happen.” And then he said, “Now, so we are going to take a firm line essentially and we’re going to raise interest rates.” And if you’ve just confessed that you don’t know what’s going on, it’s very odd that you have a very firm idea about what you should do. Remember Einstein is quoted as having said, “Insanity is doing the same thing over and over again and hoping for different results.” And I think that in some sense, is what’s going on.
You just fall back on the old recipes and you just hope that this time they will work out. But you can see people now saying, “Well, we have no idea where we’re going.” And people have very different opinions about that. People on the Monetary Committee in the UK are saying, “well, we should really be reducing interest rates right now, otherwise we’re going to fall into a real recession.” Other people say, “No, if you don’t do that, then we are going to lose our credibility.” And two people, the prime minister of Finland and then Emmanuel Macron, both of them said, “It seems very odd that we should be turning our whole idea of the economy around the notion that what we have to protect is the credibility of central banks. Should we crush the economy to keep this credibility of the central bank in the air?” And I think that’s quite right, that’s not our objective. Our objective is the welfare of the people in the economy, not the credibility of the central banks. But that sounds tough, sounds firm, and austerity just comes back again.
The Mint: And where do you see hope then?
Alan: I do see hope in the sense that I think people, particularly younger people now, are beginning to see that many of our big problems can only be solved by cooperation. For example, take the environment, the only way we’re going to get to do anything serious about that problem is a high level of cooperation amongst nations and amongst firms and everybody. And if we insist on competition and competitive advantage all the time, we are not going to catch that train, and I think we need to catch that train. Things are getting… It’s going much faster than people thought. And so my hope is that thing, as we see all these for example, climatic change or the consequences, as we see inflation suddenly springing up, as we see those things happening, that must at some point wake people up to the idea that we’ve got to think differently, right?
The Mint: Well, identify them.
Alan: Then what those people will say to you is, “How should we think differently? What should we do?”
The Mint: They will. And I suppose, yes, we need some answers to that.
The Mint: And yes, I think cooperation is a great word, isn’t it? But there’re also lots of people who want America first and Britain first pushing everyone… Pushing the voters back into the sea and so on.
Alan: But do you remember? We all remember the quote from Adam Smith about, “If you let the people do their own thing, then of course things will be satisfactory from a global point of view.” It’s not in the interest of the baker and the butcher and so forth, they’re not doing this for us, they’re doing it for themselves and that makes things work out. But he also has another quote that people don’t to use very often where he says, “People have this rapacious taste to get back to everything that’s good for them.” He said, “And we will never stop the idea from many people that it’s me first.” That’s essentially what Adam Smith said elsewhere. But we don’t quote that very much. But there is always that danger, and the prisoners to them, it’s the tragedy of the commons, it’s the whole story that people suddenly or nations suddenly become extremely self-centred. And we saw that in COVID with the vaccines and so forth.
The Mint: I suppose when people are afraid and uncertain and feel under threat, that’s when they become self-interested and me first and so on. Well, let’s hope more cooperation springs up and we go in that direction. And thank you very much, Alan, for your time and I look forward to talking to you further another time.
Alan: Thank you, Henry. It was a pleasure.