The dappled world Speech given by Andrew G Haldane, Chief Economist, Bank of England  GLS Shackle Biennial Memorial Lecture 10 November 2016  The views are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Arthur Turrell for his help in preparing the text and Rafa Baptista, Karen Braun-Munzinger, Angelina Carvalho, Doyne Farmer, Jeremy Franklin, Marc Hinterschweiger, Andreas Joseph, Katie Low, Zijun Liu, Matthew Manning, Rajan Patel, Paul Robinson, Daniel Tang, Ryland Thomas and Arzu Uluc for their comments and contributions. 1  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  Introduction I am delighted to be giving this year’s Shackle Biennial Memorial Lecture. The past few years have witnessed a jarring financial crisis as great as any have experienced since the world wars, a crisis whose aftershocks are still being felt today. Against that dramatic backdrop, I thought I would use this occasion to reflect on the state of economics, not least in helping us make sense of such catastrophic phenomena. This topic has risen in both prominence and urgency since the financial crisis (Coyle and Haldane (2015), Battiston et al (2016)). Indeed, it would probably not be an exaggeration to say the economic and financial crisis has spawned a crisis in the economics and finance profession - and not for the first time. Much the same occurred after the Great Depression of the 1930s when economics was rethought under Keynes’ intellectual leadership (Keynes (1936)).

1  Mainstream finance and macroeconomics has, then, followed firmly in the footsteps of giants, part Popperian, part Newtonian. It has been heavily indebted, intellectually, to Classical physics. That has led some to dub the dominant economic paradigm “econo-physics” (Mirowski (1989)). Less kindly, some have described economics as suffering from physics-envy. Assessing the Pros and Cons  Despite recent criticism, which has come thick and fast, it is important not to overlook the benefits from having followed this path. One benefit, shared with theoretical physics, is that economic theory has well-defined foundations. There are fewer “free”, or undefined, parameters floating around the model. Nobel 2  Laureate Robert Lucas said “beware of economists bearing free parameters”. He was right. A theory of everything is a theory of nothing. The advantages do not stop there. On the assumption agents’ behaviour is representative – it broadly mirrors the average person’s – these models of micro-level behaviour can be simply-summed to replicate macro-economic behaviour. The individual is, in effect, a shrunken replica of the economy as a whole. These macro-economic models are, in the jargon, micro-founded – that is, constructed bottom-up from optimising, micro-economic foundations. These advantages carry across into the policy sphere. If the assumptions underlying these models are valid, then the behavioural rules from which they are derived will be unaffected by changes in the prevailing policy regime. These models are then a robust test-bed for policy analysis. They are, in economists’ jargon, immune to the Lucas critique (Lucas (1976)).