The University of Oxford is delighted to announce two significant gifts which could lead to revolutionary changes in economic theory and modelling.
Mr Gerald Smith is funding a new £2 million five-year programme of research which will provide a thorough understanding of the diverse drivers that affect business cycles, technical innovation, long-term growth and interest rates. Investment company Baillie Gifford – where Mr Smith spent 30 years of his career – is supporting a senior academic who will lead the project.
Taking a new approach to economic modelling, the research team will use much more granular data from individual firms, products and industries to predict economic trends, expanding on existing work in these areas.
The project team of three academic researchers and five DPhil students will work under the leadership of Baillie Gifford Professor of Mathematics J. Doyne Farmer, who is also Director of the Complexity Economics programme at the Oxford Martin School’s Institute of New Economic Thinking.
Professor Farmer says: ‘The traditional approach of basing macroeconomic models on aggregate variables such as GDP and unemployment has not been very effective. The economy is highly diverse – unemployment for nurses is a fraction of a percent and unemployment for boilermakers is over 20%. Over a 20-year period from 1990 to 2010, the U.S. cost of healthcare went up by more than 250%, while the cost of televisions plummeted. We need to model the economy in a way that takes this diversity into account.
‘We will make use of the vast improvements in computer power and data gathering to take a new approach, modelling the economy in a way that respects its diverse range of sectors, services and behaviours and that embraces its evolutionary dynamics. More accurate data will give us a clearer picture of the forces at work in the economy, and help us formulate better policies that minimise the impact of potentially destabilising future economic events.’
Gerald Smith says: ‘Economists spent much of the second half of the twentieth century perfecting mathematically elegant models of an imaginary world, only for the shortcomings of this approach to be revealed in the opening decades of the twenty-first. Adding ever more epicycles to a fundamentally-flawed model and carrying on being surprised when the real world fails to behave as predicted is, in my opinion, a waste of time and effort when what is required is a Copernican revolution in economics. I am therefore delighted to be able to support Professor Farmer’s work in a personal capacity alongside the sponsorship from Baillie Gifford.’
James Carver, Investment Manager at Baillie Gifford, says: ‘This innovative approach to macroeconomics is an exciting project that reflects our company ethos and investment philosophy in wanting to help shape the new world and imagine what if, rather than what is. We wish Doyne and his team all the success for the challenge ahead.’