Bank of England’s Chief Economist Andrew G. Haldane speech on “Is All Economics Local” describes some positive impacts that more data can bring to economics.
In the effort towards “mapping the economy bottom-up, rather than top-down, aggregating microscopic experiences into a macroscopic view”, granular and more informative data can play a fundamental role.
Moreover, real-time and network perspective of financial flow could foster new tools to study the economy. By collapsing what currently is seen as aggregate averages of a theoretical economic agent into its multiple intra-class relations, interaction data can boost economic modelling to a new level. “The largest in physics can now simulate interactions of up to 400 billion distinct particles at any one time. That is around 50 times as many agents as there are humans on the planet. By way of comparison, the largest-scale macro-models would typically have fewer than 10 distinct agent types.”
Economics theorists may argue that for most cases the symbolic agent is a useful approximation. So it may be, but keeping in mind Central Banks peak of importance happens precisely when economy is not is its ‘most cases’ scenario challenge this view: “[Representative Agent] models fared poorly in capturing the dynamics of the economy either side of the global financial crisis. At the very time it was most interesting and important, these models were found wanting as a guide to the fortunes of the economy and economic policy.”
A fully digital environment with traceable transaction-by-transaction, real time potentially leads to creation of what the article refers to as “digital twin, a high-resolution, dynamic model of a firm-level micro-economy that can be used both to understand and to simulate a company’s operations, however complex. Their use among frontier companies is increasingly commonplace.” And he goes on to “might it be feasible economy- wide? An economy-wide map constructed at the microscopic level, and an accompanying digital twin tracking flows among the moving parts, is an intriguing vision of how a future economic model might be constructed.”
Haldane’s speech refers to the role of Central Bank acting in national scale even when dealing with local economies: “Our economies, like our politics, are local. … It calls for new data, at a higher frequency and higher resolution, and new ways of stitching it together. It means making micro-to-macro a reality.”
Such call for new data is not to be solved with a marginal improvement in wire transfer systems we have today. It’s not a matter of running more queries on transaction reports. Beyond having data from transaction ledgers, transactions themselves have to be data from inception. A new financial environment, and give some time one can see the industry being dominated by companies that themselves also rethink data as their business, bottom-up.