In October of last year, I had the great honour of co-hosting a Q&A with Lord Mervyn King on behalf of the University of Birmingham Economics Society and Investment Society. As former Governor of the Bank of England and author of two of my personal favourite books; “The End of Alchemy” and “Radical Uncertainty”, this was a great honour and something I am eternally grateful for. Having led the U.K.’s central bank from 2003-2013 through the Global Financial Crisis, Lord King was able to give us valuable insights into the current Covid-19 crisis and beyond. Here are just four of the many things I learnt from this experience.
Society often fails to cope with Radical Uncertainty
Lord King started the session by delivering a presentation on the concept of Radical Uncertainty - the theme of his recent book with John Kay. The ultimate form of Radical Uncertainty is the occurrence of Black Swan events. These are extremely rare and unexpected events, such as the Japanese earthquake of 2011, or the current global pandemic. Lord King brilliantly argued against the standard approach in economics of attaching well-defined numerical probabilities to all possible outcomes, highlighting the danger of always trying to find an exact probability. Applying this idea to financial markets, it is clear that investors should not use probabilities with complete faith, and investment decisions should certainly not ignore the potential occurrence of Black Swan events.
‘Uncertainty is the spice of life’
Lord King finished his presentation on Radical Uncertainty with the quote “uncertainty is the spice of life”. This was less of an economics or finance insight, but rather, to do with life in general. We all struggle to cope with uncertainty and the unknown, but if we were told today exactly how our lives would pan out, then a certain element of excitement would diminish. We all need to learn to cope with uncertainty, but also to embrace it and except the unknowns ahead of us.
In the light of Radical Uncertainty, economic forecasting is far from an exact science
Much like forecasting the weather, forecasting economic variables is far from exact. During his presentation and in follow-up questions, Lord King was skeptical of the accuracy and value of economic forecasts. Knowing the exact value of GDP growth or unemployment in the first quarter of next year is impossible. Just looking at the accuracy of previous forecasts, it is clear that forecasting has many problems. When Lord King was asked about his views on central bank forward guidance, he was rather skeptical, highlighting the inability of any central bank to know the state of the economy in two years’ time. It was refreshing to hear such a humble view from a former Bank of England Governor, who clearly understands the extent of central bank knowledge. As households, businesses and investors, we should all be aware of the limitations of economic forecasts and treat them with a dose of skepticism.
Everyone has a role, from the cleaner to the Governor
This last point is a step away from economics, but it is the thing that stuck with me most from the talk with Lord King. For the last question of the Q&A session, Lord King was asked what he would do if he was to have one more day as Governor of the Bank of England. He didn’t wish to talk about policy decisions out of respect for his successor. Instead, he said he would gather together (via Zoom) all of the members of staff at the Bank, from the cleaners to the chief economist, and let them know how important all of their roles are. He believes that every single member of staff is helping to conduct monetary policy and therefore, also helping to promote the stability and growth of the British economy. This is reminiscent of the J. F. Kennedy ‘man on the moon story’, and I think it truly reflects the honest and humble character of Mervyn King. We should all try to learn from this and understand the wider role we play within our different positions. Understanding the bigger picture can help us to find meaning in everything we do.
On behalf of the Economics Society, Investment Society and everyone else who attended, I would like to say a huge thank you to Lord King for the opportunity. It is an experience we shall all never forget.