This article was first published in the May 2020 UK edition of
Accounting and Business magazine.

With hindsight, there has probably not been a better time in the last 70 years to publish a book called Radical Uncertainty: Decision-making for an unknowable future.

The explosion of a global pandemic is probably the perfect point to release such a tome into the public arena. Written by John Kay and Mervyn King, it does, like the virus, turn the world – in this case of economics and business – upside down.

They have seen a bit in their time. Kay has been a distinguished economist for years. King was governor of the Bank of England. They last collaborated on a publication, on the British tax system, some 40 years ago. They have a wealth of experience. And a bit like their book on the tax system, the lesson is that, in this case, it is the economic system that is broken. In particular, they are gunning for the way that what they see as mistaken certainties have come to dominate the world of business and economics.

Going back many years, in part they reflect my own humble run-in with economics. I dropped it from my degree studies after a year. I simply didn’t see the sense of trying to say that a rule of economics was true when it was dependent on a whole raft of other unlikely occurrences. Or as Kay and King argue, economic models don’t work like the physical world where a verifiable scientific structure is in place. But people want them to.

When Kay ran an economic consultancy, he will tell you, the people who came to him wanted a quasi-scientific certainty that wasn’t possible. You can’t, he would argue, make models to make decisions about the real world. And you can’t quantify uncertainty and so price it easily and feel that you have tamed it. As they say in the book: ‘While there are some problems for which the quantification of probabilities is an indispensable guide to solutions, most decisions in business, finance, politics and personal development, and their outcomes, are too complex and imprecisely defined to be approached in this way. They are subject to radical uncertainty.’ And that is the heart of it.

So how did we get into this mess in the first place? Kay and King take us back a hundred years to a time when Frank Knight was in his prime at the University of Chicago and John Maynard Keynes bestrode the Cambridge scene in the UK. Both argued that uncertainty could not be pinned down but, over the years, the allure of a quasi-mathematical basis proved more attractive.

Pricing risk

By the time Milton Friedman came to dominate the Chicago School late in the last century, the game was up. People, particularly in business and finance, preferred certainty however you invented it. As King and Kay say in the book: ‘Risk is no longer feared because it is priced and has been accepted in return for its price. And risky assets are simply commodities to be bought and sold just like soap powder and motorcars, and like these commodities risks will end up in the hands of those most willing and able to buy them. Radical uncertainty must be erased from the picture because it cannot be measured and cannot be priced.’

But what we see around us, from virus control to basic business, is the failure of prediction. Far better to accept that economic models don’t work like the physical world and plan with an acceptance of the existence of
radical uncertainty. The years of focusing on, as Kay would put it, ‘bogus quantification’ may be coming to an end. The sensible answer to questions about prediction, he would say, is: ‘I don’t know’. And that would prove a much more illuminating starting point. ‘Within the context of a secure reference narrative, uncertainty is to be welcomed rather than feared,’ says Kay.

Robert Bruce is an accountancy commentator and journalist.