I hope that you are all keeping in good spirits during this unprecedented time. The Covid 19 earthquake has shaken the foundations of our society, and the ground has not yet stopped moving. The emergence of this deadly disease is a brilliant example of Radical Uncertainty, the fundamental concept in, and title of, a new book by Mervyn King and John Kay. It is a book aimed at decision makers trying to act in a very uncertain, unpredictable world.
It is rather tough on modern economists. The authors seek to bury the idea that macroeconomic models tell us much about what is going to happen to any large and complex system – like a country’s economy, or a particular industry or sector (or, they could have added, what the long term economic impact would be of leaving the EU single market). They reject the modern economic trend which values methodology more than its practical application to solving real problems. Their aim is to argue that economists should be seen like plumbers or dentists, using their mathematical models and reasoning as tools in their toolbox – useful in certain contexts, and useless in others. Economists should play a major role in decision making, but that role should be to frame the economic and social issues that political and business leaders face when confronted by radical uncertainty.
What exactly is Radical Uncertainty? Radical Uncertainty differs from resolvable uncertainty (or, for you and me, risk) in so far as it cannot be quantified in terms of probability. Whether the roulette wheel lands on black or red is a quantifiable uncertainty, as is whether or not Roger Federer will win a particular tournament. With radical uncertainty, there is no means of resolving it. We just do not know – it cannot be described in probabilistic terms applicable to a game of chance.
It is important to note that we are not only talking about the “black swans” made famous by Nicholas Nassim Taleb (who gets several rather approving mentions in this book) – surprising events that nobody could have anticipated until they happen, although black swans are examples of radical uncertainty. The authors emphasise the huge range of possibilities that lie in-between the world of unlikely events which can still be described with the aim of probability distributions, and the world of the unimaginable. The only sensible strategies in business and politics are those which acknowledge that almost anything can happen in the future.
Before I was elected as a Conservative MP in 2017, I worked in the City of London as a corporate lawyer doing M&A deals then as a senior executive in restructuring and strategy for HSBC. The City is a very different place from Westminster, but the reverence for those with impenetrable spreadsheets is similar.
As a junior corporate associate, I remember being in a particular meeting with some executives from a major private equity house (who were my clients) about to put in a final bid to buy a company in Eastern Europe, and somebody got cold feet because of a worrying piece of economic research which came in from a major investment bank, which had made a rival bidder pull out of the deal. After much panic in the early hours of the morning, a very experienced senior banker got on the phone and essentially said that the business was sound, the debt was at a good price, he had worked in that particular country several times and it was reasonably well run, and this was as good as it was going to get in the uncertain world of private equity.
They signed the deal, and it was extremely lucrative for them after they sold the company 5 years later. The senior banker had no more data (probably less) than the people in the room; but his experience told him that the deal was a good one, based on a sophisticated understanding of the business and the particular business environment.
I recount this tale because, rather surprisingly for economists, the authors take a rather anthropological approach in this book. They do not fetishise the analysis of data as a way of making better decisions. They have faith in the human instinct; and with well – balanced teams see the benefits to decision making produced by the social nature of human beings. They invite the reader to accept human “irrationality”, “hunch” and emotion as very valuable signals in tough decision making in business or politics.
The reason why decision making is so hard is that the playing field is always changing. In the real world, rather than the idealised one favoured by certain modern economists, nothing is ever still. Comparisons are extremely hard. Experiments are almost impossible to run. The search for a single, comprehensive forecasting model in the economy, or indeed in politics, is fruitless. There is no stable structure of the world about which we could learn from past experience and use to extrapolate future behaviour.
The authors show convincingly that the models used by banks and central banks perform reasonably well when nothing much is happening but fail dramatically when something big occurs – precisely when the decision maker needs a key insight.
Covid 19 came out of the blue. There is no financial model (or political analyst) which could have predicted its occurrence this year. Even as late as February, when the disease was starting to show its teeth, the models produced which estimate the economic impact on the UK economy in Q2 this year now look hopelessly inadequate. I suspect when all this crisis is over, the first models put together by the epidemiologists in January or February will be far off what actually transpires.
I think back to a conversation I had in the House of Commons in mid-January. My senior colleague was confidently predicting how the Conservative Party would dominate the political stage for probably ten years at least, with our large majority limiting the impact of normal mid-term political pressures. At the end of this era we would have brought down our debt, strengthened the British economy, invested heavily in public services, and all sorts of other good things. Seeing as the Conservative Party only has two modes – complacency or panic – since December we have been firmly in the former mode. Such hubris seems ridiculous now, but it didn’t feel so at the time.
In order to deal with this crisis, this Conservative government is having to do things which none of us would have even contemplated six months ago. We have renationalised the railways, paid people’s wages, and much else. Unwinding the measures will be difficult in many cases, and some of them we may need to keep. It is a huge challenge, and it highlights the importance of why political personality and character should matter in politics more than policies. The biggest decisions made in politics tend not to be ticking off manifesto promises, but on the issues that come up randomly, seemingly out of nowhere. Asquith and August 1914. Thatcher and the Falklands War. Blair and 9/11. George H W Bush and Desert Storm. How good will a leader be in a crisis situation that nobody predicted? Having the right person, leading the right team, at the helm matters more than anything else. Thank goodness that person is Boris Johnson not Jeremy Corbyn.
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