Radical Uncertainty: Decision-making for an unknowable future
Author: John Kay and Mervyn King
Publisher: The Bridge Street Press
Price: Rs 799
But, with the focus of the subject itself, the understanding of risk and uncertainty changed over time. Milton Friedman in A Provisional Text argued: “In his seminal work, Frank Knight drew a sharp distinction between risk, as referring to events subject to a known or knowable probability distribution, and uncertainty, as referring to events for which it was not possible to specify numerical probabilities. I have not referred to this distinction because I do not believe it is valid…We may treat people as if they assigned numerical probabilities to every conceivable event.” The concept of uncertainty, as underscored by Keynes and Knight, lost relevance over time.
As a result, in practice, since it was possible to assign probabilities to every possible outcome, risk could be priced and contained. It worked all fine until radical uncertainty made a comeback. Instruments designed to contain risks in the financial system themselves threatened to bring it down in 2007-08. In early 2007, the Northern Rock bank in the UK, for instance, declared to its shareholders that it was the best-capitalised bank in the country. Perhaps no one in the bank or elsewhere anticipated how vulnerable the state of its balance sheet was. The bank ran out of money in a few months. A similar story played out in several financial institutions on both sides of the Atlantic Ocean.
Mr Kay, the first director of the Said Business School at Oxford University and a Radical Uncertainty does not specifically talk about the current challenges, the broader context would help the reader apprehend the situation with greater clarity, question popular wisdom, and improve decision- making. As the authors rightly note: “Real households, real businesses and real governments do not optimise; they cope.”
Despite all the economic understanding and technological development, this is exactly what is happening. In fact, this is how things are all the time. It’s just that the uncertainty is more pronounced now. Although the world is grappling with numerous uncertainties, here’s one worth pondering. In order to provide relief from the pandemic, governments across the world are piling on debt and large central banks are liberally printing money. This is probably the right thing to do in the given circumstances, and it is likely that governments and central banks will continue with these policies. But are there limits to such policy interventions? Maybe. How will all this end? Well, who knows!