Fox or hedgehog, economists need to be flexible and not abandon real insights

In his essay The Hedgehog and the Fox, Isaiah Berlin draws on an ancient Greek aphorism: “The fox knows many things, but the hedgehog knows one big thing.” He uses this device to divide people into two groups. Hedgehogs see the world through a single, all-embracing idea. They have a view of how the world works and want to make sense of as much as possible through this lens. They will fit events into their mental narrative. Foxes draw ideas and inspiration from eclectic sources. They are more comfortable with ambiguity, with a wide range of inputs. They don’t try to fit all actions and ideas into a single, coherent world view.

Many of us are rather erinaceous (“hedgehog-like”, as I’m sure you know) in the way we construct narratives to fit our world view. Psychological experiments show how the same facts are interpreted differently by people according to their prior narratives. Hedgehogs risk ignoring new information, or unconsciously bending it to confirm their prejudices. That’s one reason why Keynes’s question “When the facts change, I change my mind. What do you do, sir?” is so apposite. The natural answer is that of course we change our minds in response to new facts. The honest answer is that all too often fail we to do so.

Andy Haldane, the Bank of England’s chief economist, is a quintessential fox. Last week he talked about the failure of economists to get their predictions right both before the 2008 crisis and in the wake of the Brexit vote. In doing so, he warmed to a consistent theme, criticising the limits of economists’ models, searching for new methods, looking to take inspiration from the natural sciences in building our understanding of the way the economy works. The theories and predictions of standard models did not work; it is time to try something new.

Do all economists need to follow the vulpine Mr Haldane? To an extent, for sure. We can be rather erinaceous. First, we find it as difficult as everyone else to admit that we were wrong when the facts change. In his book Black Box Thinking, Matthew Syed, my fellow Times columnist, quotes the example of top American economists predicting that the Federal Reserve’s programme of quantitative easing would have disastrous results. It didn’t, but none of those economists could admit it. A hedgehog can always read the data in such a way as to confirm their mental model.

Some among our number certainly need to be more open-minded (that is true of all professional groups), but economists can be hedgehogs in a more fundamental way. We build our models on particular sets of assumptions about how people behave and use particular methodologies that we apply astonishingly widely. Economists don’t work only on forecasting growth, inflation and unemployment (indeed, a disappearingly small number do) or on tax, trade, competition and other things that you’d expect. They also apply these models and methods to crime, voting behaviour, marriage decisions and much more. This can lead to invaluable insights, but does risk forgetting that models are just models and thus, hedgehog-like, imposing a single structure on the world.

On the other hand, economists are fox-like enough to bring new theories and disciplines into their models and understanding of the world. Behavioural economics imported theories and evidence from psychology wholesale. Danny Kahneman, a psychologist, won the Nobel prize for economics for his contribution.

There are plenty of economists who have Mr Haldane’s fox-like qualities, but even he has prickles. He grabbed the headlines with his comments on economists’ Michael Fish moment in their failure to predict the financial crisis, and the mistakes in forecasting what would happen in the months after a vote for Brexit.

What got fewer headlines was his confirmation that he thought the Bank was right to say that Brexit would be economically damaging over the medium term. While short-term forecasts depended on uncertain views about business and consumer confidence, longer-term forecasts were based on changed trading arrangements. It’s a pretty basic insight that if you make trade with your biggest and nearest trading partner more expensive and difficult, you will make yourself worse off.

That is part of a world view from which it would be difficult to shake most economists. That’s not based on blind faith. It’s because evidence and theory overwhelmingly support it. They also support investment in skills and infrastructure, effective competition policy and an efficient tax system, stable economic institutions — including independence for the Bank of England in setting monetary policy — and much besides.

We (think we) know that these are the policies that promote prosperity. These insights have been rather successful in driving economic growth. Despite the gloom of the most recent past, the British, European and world economies have been remarkably successful over the past 50 years. The application of these insights to the former communist states of eastern Europe has not been unproblematic, but for most the transformation since the dark days of Soviet economics has been phenomenal.

So we should continue, fox-like, to seek to understand the world better and to draw in new theories and evidence. But we should not shy away from building on and explaining those parts of our world view that really work and matter. Hedgehogs have their place.

This article was first published in The Times and is reproduced here with permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist